Backgrounder: Making Sense of the U.S. Health Care System: A Primer

Prepared for EvidenceNetwork.ca by Lee Tunstall

Backgrounder: Making Sense of the US Health Care System

Overview

The U.S. health care system is not a universally accessible system – it is a publicly and privately-funded patchwork of fragmented systems and programs. Insured Americans are covered by both public and private health insurance, with a majority covered by private insurance plans through their employers.  Government-funded programs, such as Medicaid and Medicare, provide health care coverage to some vulnerable population groups. The government also publicly funds coverage through Indian Health Services and the military.

Despite implementation of the Affordable Care Act (“Obamacare”), introduced in 2010, 10.4 percent of Americans (33 million) remain uninsured.

Although public financing comes secondary to private sector financing in the U.S. health care system, it is worth noting the breakdown of sources of payment as reported in 2013. Some calculations estimate that public payers (federal and state governments) account for almost half of all health care expenditures (46 percent), private third-party payer sources, 27 percent, while households pay the remaining 27 percent. Other calculations, however, estimate that public sources pay as much as 60.5 percent of total health spending, when taking into account federal tax subsidies for private insurance and government purchases of private insurance for public employees. In other words, government financing of the health care system in the U.S. is sizeable.

The U.S. spends far more public and private money combined on health care than any other OECD country – 16.4 percent of GDP in 2013 compared to the second-highest countries, the Netherlands and Switzerland at 11.1 percent of GDP. For context, Canada ranks 10th highest at an estimated 10.2 percent of GDP.

Unfortunately, this higher spending does not translate well to health outcomes.

The U.S. consistently ranks lower in some measures when compared to its peers around the world, such as in infant mortality rate and life expectancy. The lack of universal coverage for its population is the major challenge, resulting in inequality among different population groups regarding health care access, health resources and health outcomes. The fragmented financing and delivery system also lags behind other countries in the introduction of health information technology.

However, the amount spent on the system produces some positive outcomes for those well enough insured to benefit. The U.S. health care system has a large and well-trained workforce, including high-quality medical specialists, though at the expense of too few primary care generalists to meet demand. It also has excellent health care facilities and research programs.

Medicare and Medicaid

Only 30 percent of the population is covered by three publicly funded insurance programs: Medicare, Medicaid and the Children’s Health Insurance programs.

Medicare is a national social insurance program administered by the federal government, accessed primarily by seniors aged 65 and older, and by some people living with a disability. Medicaid is a state-based insurance program accessed by some poor and near-poor. The State-based Children’s Health Insurance Program (CHIP) insures children up to age 19 from families with incomes too high to qualify for Medicaid. Depending on the state, this income can be up to or above 300 percent of the Federal Poverty Level (FPL).

Medicare

Medicare consists of four “parts”, which cover different services. It is largely publicly-funded but with increasing cost sharing for end users since its inception. Medicare Part A provides hospital insurance, funded through payroll taxes. Medicare Part B provides medical insurance, for which individuals pay monthly premiums.

Medicare Part C, the Medicare Advantage Plans, is a voucher program offered through private commercial insurers who contract with Medicare to provide Part A and Part B benefits. Medicare Advantage Plans include Health Maintenance Organizations, Preferred Provider Organizations, Private Fee-for-Service Plans, Special Needs Plans, and Medicare Medical Savings Account Plans.

Medicare Part D is an outpatient prescription drug program offered through private insurers funded by the federal government to delivery Part D benefits. In 2015, the Medicare program covered over 55 million Americans and made total benefit payments of $514 billion.

Medicaid

Although the federal government provides broad guidelines and partial funding for Medicaid, the program is managed and partially funded by individual states. It is means-tested, with states having ultimate control over eligibility. State participation in Medicaid is voluntary, but all states have been part of the program since 1982. Services covered by the states vary widely, and in 2015, 70.5 million American children and adults were covered by Medicaid.

Children’s Health Insurance Program (CHIP)

Some children are eligible to be covered under the CHIP program, which is regulated by the federal government, but administered at the state level. Eligible children come from families at between 200 percent and 300 percent of the federal poverty level ($44,700 to $67,050 for a family of four). Under certain circumstances, pregnant women are also eligible for coverage in some states, and children of low income state (public) employees are covered under the ACA expanded CHIP.

President Obama signed the Children’s Health Insurance Program Reauthorization Act of 2009 (CHIPRA) in February of 2009, which created new funding, new program features and new incentives to cover children. This was designed to make it easier to sign more children up for the program and now more than 43 million children are covered.

Private Payers

The majority of privately insured Americans are in group plans that are subsidized, at least partially, by their employers. The remaining insured population not covered by employer-sponsored plans purchase individual private insurance, with premiums varying by age and deductibles, co-payments and co-insurance much higher (average three times higher) than in the employer-sponsored market.

The 13.4 percent of Americans (42 million) who are uninsured often make use of non-profit community health centres or hospital emergency rooms for their health care needs, though many go without care. Uninsured Americans can access emergency rooms through the Emergency Medical Treatment and Active Labor Act (EMTALA) of 1986, which legislates participating hospitals to accept all patients but only for a medical assessment and stabilization. It remains unfunded, though non-profit hospitals receive large tax deductions for providing uncompensated care.

Most Americans who are part of group insurance plans, either through their employer or arranged individually, are enrolled in some type of managed care plan. These plans contract with a network of health service providers, such as doctors, hospitals, clinics and other health care providers such as pharmacies, labs, x-ray centers and medical equipment vendors, to provide services to their clients.

Legislation to create a new type of plan, Health Savings Accounts (HSAs), was passed by Congress in 2003. HSAs are similar to another type of tax-advantaged funding mechanism, Medical Savings Accounts (MSAs), which have existed since the 1990s to assist those who can afford it to contribute to them in paying for medical care.

An HSA is a tax-exempt trust or custodial account established with a qualified HSA trustee to reimburse certain qualified medical expenses incurred by the holder, thereby providing tax benefits for those enrolled. Individuals have an average $2,000 deductible, often double that for families. Premium contributions, sometimes made by employers, but often made only by employees, are tax-deductible and can be rolled over annually. Funds can then be withdrawn from these accounts to pay for medical expenses.

HSAs are often combined with High Deductible Health Plans (HDHPs), where insurance does not kick in until after the insuree has paid out several thousands of dollars in out-of-pocket costs.

Private Delivery

Health maintenance organizations (HMOs) are health networks that require the insured party to receive most or all of their health care from a single network provider. Primary care physicians (PCPs) are the first point of contact and only they can provide referrals to other services, but again only within the HMO network. Individuals enrolled in an HMO must have an in-network PCP, as HMOs will not provide coverage without one. As a result of these tight restrictions, and high costs, HMOs have lost favour with consumers over the past decade.

Preferred provider organizations (PPOs) also contract with a network of providers. They pay providers on a fee-for-service basis, and although it is easier to seek care from providers outside of the PPO network than it is with HMOs, this means the patient pays more to see an out-of-network provider. Insured individuals can choose their own PCPs, and do not need a referral from their PCP to see a specialist, if that is allowed by the specialist.

PPOs have grown in popularity over the past decade and in 2012 accounted for 56 percent of employees insured, while 25 percent were enrolled in HMOs or point-of-service (POS) plans.

Point-of-service (POS) plans are a hybrid between PPOs and HMOs. Like an HMO, enrollees must have an in-network PCP to coordinate their care, but like a PPO, it is easier, albeit more expensive, to go out of the provider network for health care services.

Patient Protection and Affordable Care Act (ACA) of 2010 (Obamacare)

With one in six Americans uninsured, the Patient Protection and Affordable Care Act of 2010, colloquially known as Obamacare, was introduced in 2010 in an attempt to help improve health insurance coverage through insurance regulatory reform and individual/employer mandates to purchase insurance. It eventually passed after vociferous debate in Congress and has four main goals: 1) to expand insurance coverage for Americans; 2) to improve under-insurance; 3) to improve quality of health care; and 4) to control expenses. There have been a variety of features introduced each year since the bill passed.

One of the key features, and also one of the most controversial, is a mandate requiring that all uninsured individuals and families in America must purchase at least a basic form of health care insurance – known as the minimum essential coverage – or they will be fined (in 2015, $325 per person and $162.50 per child per year, or 2 percent of income (whichever is greater)). There are exceptions to this financial penalty based on religious objections or financial hardship, and for Native Americans, those without coverage for less than three months, undocumented immigrants, incarcerated individuals, those for whom the lowest cost plan option exceeds 8 percent of an individual’s income and those with incomes below the tax filing threshold (in 2009 the threshold for taxpayers under age 65 was $9,350 for singles and $18,700 for couples).

To help ensure buying insurance will not become an undue financial burden, subsidies are available for some individuals and families who have incomes under 400 percent of the federal poverty level. Despite these efforts, estimates show that the ACA will leave between 26 million and 31 million people uninsured.

The ACA is allowing many previously uninsured individuals to access health care. One study projects that 52,000 more primary care physicians will be needed by 2025 to meet this increased demand, though this demand will also result from population growth and an aging population.

With some 10 million “newly insured” individuals potentially accessing the health care system in 2015, existing health care systems operating at near capacity could experience some stress, although opportunities for early interventions and ACOs could provide better health management for these individuals. There is also an opportunity for non-physician healthcare providers (nurse practitioners or physician assistants) to become more active in providing services to individuals. And a rise in technologies that can provide individuals with more control over their own healthcare (through new software applications and digital health devices) as well as allow health care professionals to monitor patients in a more cost-effective manner and at a distance.

Insurance exchanges

Insurance exchanges or marketplaces, have been established by some state governments, as well as by the federal government, to help individuals find appropriate insurance plans. They only accept applications for a certain period each year, known as the Open Enrollment Period, and must cover essential health services.

There are four different “metal” plans available, with differing deductibles (from no deductible to $5,000 per person*), premiums and out-of-pocket costs (from 40 percent – 10 percent of charges, with maximums from $8,000 to $13,000 per family*) according to the level: bronze, silver, gold and platinum. To tackle under-insurance, private insurers cannot deny insurance to people with pre-existing medical conditions, nor can they cancel policies if patients become ill, a practice known as rescindment.

The exceptions to this policy are that smokers can be charged 50 percent more for premiums, and older adults can be charged up to three times more. There are also no annual or lifetime limits on medical benefits received and 80 percent of the premiums must be returned in the form of benefits to patients (85 percent for large insurers), though evidence has shown that this has not been the case even though required. Small business with over 50 employees must offer insurance or pay a penalty, but this is offset somewhat by tax credits given to some smaller businesses.

A 2015 report states that insurance plans provided by these exchanges tend to limit the availability of health care providers by as much as 34 percent, with particular shortages in oncology and cardiology specialists. This is important because out-of-pocket expenses are subject to limits within these exchange plans, but not when an individual seeks care from outside the provider network, the out-of-pocket expenses have no limit and can be substantial. These out-of-pocket expenses (including high deductibles, co-payments and co-insurance) are becoming a considerable burden to lower and middle income Americans, especially those with employer-provided plans. Deductibles for these plans increased from $584 per person in 2006 to more than double that at $1,217 in 2014.

Cost containment was also a key goal of the ACA, to be implemented by a number of unproven remedies: Electronic Medical Records, comparative effectiveness research, making prevention cheaper for patients and IT development. The ACA has also been accused of controlling costs by shifting them on to those who get sick.

Additionally, Accountable Care Organizations (ACOs) were introduced under the Medicare program. These are groups of doctors, health care providers and hospitals who voluntarily join together to provide integrated care to Medicare patients. To date, there has been no evidence that any of these cost containment strategies have been successful.

Medicaid was also expanded in some states under the ACA legislation.  In any state that accepts federal subsidies, Medicaid was expanded to individuals and families earning 133 percent of the federal poverty level, as opposed to 100 percent. To date, only 29 states are accepting these federal subsidies.

A further controversial feature of the ACA was the increase in taxes for higher-income individuals. The Additional Medicare Tax took effect on January 1, 2013, and equates to a surtax of 0.9 percent on wages and self-employment income that exceeds between $200,000 and $250,000, depending on marital status.  There is also a different tax on individuals that have investment income over certain amounts. This equates to a 3.8 percent net investment tax on capital gains, dividends and passive income.

Legal Challenge to ACA

It comes as no surprise that with such a widespread reform as ACA, there would be legal challenges to the legislation.  In June 2015, the U.S. Supreme Court, in a ruling known as King v. Burwell, decided that state subsidies for lower- and middle-income Americans were legal, even if they used the federal insurance marketplace as opposed to a state-operated one. An earlier 2012 Supreme Court decision held that the individual mandate, which was the minimum essential coverage provision, was constitutional. The same decision, however, allowed states to effectively opt-in to the ACA Medicaid expansion reforms, if they chose to receive federal subsidies. Those opposed to the new law show no indication of ending their legal efforts to have the law repealed.

In spite of this opposition, the ACA has become increasingly more popular since its introduction. In August 2015, the Kaiser Family Foundation reported that 44 percent of all adults viewed the ACA favourably, while it was unfavourable with 41 percent. As the ACA has resulted in higher deductibles and cost sharing, some argue that the market for secondary supplemental health insurance to cover these gaps is gaining pace.

How well is the system performing?

According to the Commonwealth Fund, in 2013, the U.S. had health expenditures of $8,508 per capita and total health expenditures of 16.4 percent of GDP, the highest by far of the 11 developed countries surveyed. One of the issues with the fragmented U.S. health care system is that data collection is also fragmented and difficult to find. However, when outcomes are known, the U.S. system generally underperforms when compared to other developed nations. It is worth noting that some have questioned the appropriateness of the outcomes used by the Commonwealth Fund.

The U. S. health system ranks particularly poorly when it comes to efficiency, equity, access and indicators of healthy lives, ranking last of 10 OECD countries to which it was compared in the 2014 Commonwealth report. As for quality of care, in four categories (effective care, safe care, coordinated care and patient-centered care) the U.S. ranked highest in effective and patient-centred care, while only average in the other categories. As the ACA was designed to improve many of these measureable outcomes, it remains to be seen if this will come to pass and future studies on comparative system performance will be watched with interest.

There are other outcomes to consider, not included in the Commonwealth rankings, such as the continuing problem of access to care, cost to patients and other payers, and the uneven coverage that results from hundreds of companies offering thousands of different plans.

Emerging Issues with the U.S. healthcare system

The U.S. health care system is lagging behind other countries when it comes to the use of electronic health records (EHR), partly because of its inherently fragmented nature. The Health Information Technology for Economic and Clinical Health (HITECH) Act of 2009 (part of the American Recovery and Reinvestment Act 2009) was designed to improve this gap. It made the use of EHRs mandatory in order to for physicians and hospitals to maintain their existing Medicaid and Medicare reimbursement levels.

The ACA has also created incentives for adopting EHR systems, through the Medicare and Medicaid EHR Incentive Programs. This drive for mandatory EHRs has been reported as a reason behind many small private practices closing.

Underinsurance as a barrier to access to care is also an emerging issue. With higher deductibles, an estimated 31 million Americans in 2014 were considered to be underinsured, up from an estimated 16 million in 2003.  This is placing many more Americans in financial distress, as medical bills become medical debt. It is also leading more and more Americans to skip needed medical care as a result.

Additionally, the health system in the U.S. is consolidating. More and more physicians are giving up private practices and becoming employees of larger corporations.  In 2013, just 36 percent of physicians were in private practice, down from 57 percent in 2000, with many citing increased business expenses, the prevalence of managed care, and the requirement for EHRs given as top issues they were facing. Hospitals are also buying physician practices at a fast rate, increasing this rate of physician employment and leading to higher prices.

Rising pharmaceutical costs, especially the introduction of super high-cost drugs, are also added to higher cost structures to U.S. health care. More patients are also using more specialty medicines for a cumulative high annual cost. Nearly 140,000 Americans have annual drug costs of more than $100,000 per year.

* As of October 22, 2015.


Experts available for interview

Jody Heymann, MD, PhD
University of California, Los Angeles
US Healthcare System, Social Policies, and Health
1-310-825-6381 | jody.heymann@ph.ucla.edu

Theodore R. Marmor, PhD
Yale University Emeritus
US, UK, Holland, German, and Canadian Healthcare Systems
1-646-918-6159 | 1-203-376-7739 (c) | theodore.marmor@yale.edu

Karen Palmer, MPH, MS
Simon Fraser University
Comparative Health Policy, Activity-based Funding, US and Switzerland Healthcare Systems
778-558-1249 | kpalmer@sfu.ca
Switzerland


Our commentaries on the U.S. system

Why Canada shouldn’t compete with the U.S. for the worst performing health system in the developed world
Canada fares better than the U.S. on value for healthcare dollars — but lags behind other developed nations
Why breastfeeding breaks for working moms pay off
U.S., Canadian health care systems share some challenges
Comparing U.S., Canadian health care systems
Why this U.S. doctor is moving to Canada
What the future of American health care means for Canada
Learning from European and U.S. health care
Why Canadian hospitals outperform U.S. hospitals

Further reading

For recent comparisons between the U.S. health care system and other international systems, see: U.S. Health in International Perspective: Shorter Lives, Poorer Health (2013) and Mirror, Mirror on the Wall: How the performance of the U.S. health care system compares internationally – 2014 Update.

See also, The Patient Protection and Affordable Care Act of 2010, in its entirety or section by section.

A good analysis of the ACA was written by Trudy Lieberman for Harper’s Magazine (July 2015): Wrong Prescription? The failed promise of the Affordable Care Act.

For a report on how insurance premiums are changing as a result of the ACA, see: Analysis of 2015 Premium Changes in the Affordable Care Act’s Health Insurance Marketplaces.

For conservative and libertarian views of the ACA, see think tanks such as the Manhattan Institute for Policy Research, the Galen Institute,  the Cato Institute, and the American Enterprise Institute.

More liberal think tanks also have viewpoints on the ACA, such as the Center on Budget and Policy Priorities, the Economic Policy Institute, and the Commonwealth Fund.

The Centers for Disease Control and Prevention’s National Center for Health Statistics (NCHS) is the United States’ main health statistics agency.  It includes annual reports on the health status of the U.S., as well as fact sheets on various health issues, including insurance and access to care, obesity and racial and ethnic disparities.

The Federal Interagency Forum on Child and Family Statistics (Forum) also produces an annual report, known as America’s Children: Key National Indicators of Well-Being, as well as special reports on an ad hoc basis.

The Agency for Healthcare Research and Quality (AHRQ), a division within the U.S. Department of Health and Human Services, provides annual reports on National Healthcare Quality and Disparities. These reports measure trends in effectiveness of care, patient safety, timeliness of care, patient centeredness, and efficiency of care.

The U.S. also has a Health Indicators Warehouse, which is housed within the National Center for Health Statistics but is a collaboration between many agencies and offices within the Department of Health and Human Services.

The Kaiser Family Foundation also has a good summary of Medicare spending and financing. The foundation also produces an annual Employer Health Benefits Survey.

 

 

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