Financing of Health Care Delivery Research Paper Starter

Financing of Health Care Delivery

(Research Starters)

Who pays for health care? In the United States, the financing of health care delivery is a tangled web of private insurance companies, employers, state and federal governments, and individual consumers. Despite the passage of the Patient Protection and Affordable Care Act in 2010, which expanded access to health care coverage, the United States remains one of the few developed nations that does not provide universal health coverage to its citizens. As measured by percent of gross domestic product (GDP), the United States also pays more for health care than any other developed nation. Paying for health care is a complex, politically charged enterprise. In this essay, the major players in the health care arena are described and a brief discussion of approaches to health care finance reform are presented.

Keywords Employer-based insurance; Health Savings Accounts; Managed care; Medicaid; Medicare; CHIP

Health Care Management: Financing of Health Care Delivery


Historically, health care was provided by the family in the home. Doctors were called in to attend the sick only as a last resort. This was in part because doctors had a limited range of medicines and technologies to use. Physician fees were low and payment, especially in rural areas, was often rendered in the form of foodstuffs or services. Hospitals existed, but they existed as religious and charitable institutions that served the poor, the elderly, and the mentally ill. Hospitals depended on wealthy community sponsors for financing, and hospital staff members were predominantly volunteers.

With advances in treatment, scientific and technological breakthroughs, and the understanding of asepsis, the identity of hospitals transformed from warehouses for the poor and infirm to modern venues for treatment and care. With this transformation emerged a new partnership for physicians and hospitals. Physicians needed hospitals as a clean, organized, and fully staffed venue for their medical practice. Hospitals needed physicians for their patient base and medical expertise. Hospitals also became increasingly important as medical teaching and training sites. In this symbiotic relationship, the first great divide in the financing of medical care began to emerge. Physicians retained their medical expertise and charged patients accordingly. At the same time, hospitals emerged from being strictly room-and-board charity institutions to complex organizations requiring skilled workers and specialized equipment, so hospitals began establishing their own system of patient costs and payment structures. In some instances, city governments assisted with hospital funding as part of a larger program of public service infrastructure. Increasingly, individual patients were able to pay for their own costs of care (Starr, 1982).

This cost structure of physicians and professional fees on the one hand, and the bricks and mortar and equipment of the hospital on the other hand, underlies the financial structure of paying for health care up to the present day. In the following sections, the major players and their roles in health care finance are described.

Employer-Based Insurance

Employer-based health insurance accounts for the majority of health care coverage in the United States. According to US Census data, more than half of the US population (55.1 percent) had employment-based health insurance coverage in 2011. Of the employed population aged eighteen to sixty-four years, 68.2 percent had health insurance through their own employer or another person’s (typically a spouse’s) employer (Janicki, 2013). However, with rising health care costs and fluctuations in the economy, the number of employers offering health insurance as a benefit has been dropping since the late 1990s. The likelihood of employment-based coverage declined from 64.4 percent in 1997 to 56.5 percent in 2010 (Janicki, 2013). Particularly hard hit are small firms with few employees. In 2001, only 39 percent of firms with ten employees or less offered health insurance to their employees as compared to 95 percent of firms with 100 to 999 employees and 99 percent of firms with over one thousand employees (Glied, 2004). One of the reasons it is difficult for small businesses to supply employment-based health care coverage is they do not have enough employees to reduce their actuarial risks, so smaller businesses cannot secure premiums as cheaply as large companies (Ubel, 2013). However, under the Affordable Care Act, small employers with fifty or fewer employees are eligible for a new tax credit if they offer employment-based health insurance coverage.

Employer-based health insurance began in the late 1920s. With the Great Depression as an impetus, hospitals came together to offer a plan of hospital insurance as a means to ensure that patients would be able to pay their hospital costs. One of the earliest plans was Blue Cross, formed in 1929. The most notable feature of the Blue Cross plan was that it was offered only through employers. In 1947, Associated Medical Care Plans was formed as the first national association of Blue Shield plans (Blue Cross Blue Shield, 2007).

Enactment of the National Labor Relations Act of 1935 served as a further impetus for employer-based health insurance. Under the wage and price controls mandated by this act, employers could not recruit workers using higher wages as a lure nor could they increase existing wages to retain current workers. The use of benefit packages became an important tool for employee recruitment and retention. Health insurance coverage was an especially attractive feature in the benefit package for employers as well as employees for two reasons:

  • First, the benefit was exempt from income and payroll taxes for the employee
  • Second, the employer could write off the cost of insurance coverage as a cost of doing business.

In 1940, approximately 10 percent of American workers had employer-based health insurance. By 1955, this percentage increased to 70 percent (Blue Cross Blue Shield, 2007).


Medicare is the health care industry's single largest payer of health care services. Medicare is an entitlement program for US citizens aged sixty-five years and older. It was enacted in 1965 as Title 18 of the Social Security Act and is especially notable as one of the cornerstones of President Lyndon Johnson's Great Society social programs. In addition to providing health care coverage for persons sixty-five years and older, Medicare also provides coverage to individuals eligible under Social Security disability and for all persons with end-stage renal disease. Medicare is funded through payroll deductions made during an individual's working career. The program is administered by the Centers for Medicare and Medicaid (CMS), an agency in the US Department of Health and Human Services.

Medicare Part A

Medicare services are divided into several components. Medicare Part A provides insurance for acute care hospitalization. Acute care refers to any medical condition that is diagnosed and successfully cured. Examples include a broken bone, an intestinal disorder, a fungal rash, and other more or less complicated diseases. Medicare Part A also covers skilled nursing care services, in the home or in a health care facility, and pays for hospice care. Medicare does not pay for long-term care services in a nursing home. Long-term care refers to a condition that can be diagnosed but not necessarily cured and must be treated by managing the symptoms or effects of the disease. Examples include arthritis, diabetes, and some forms of cancer, among others.

Under Medicare Part A, up to ninety days of hospitalization is covered for each individual medical event. When Medicare was first enacted, hospitals submitted claims for cost reimbursement to the Health Care Finance Administration (the forerunner of CMS). Reimbursement rates for each hospital were set according to a complex set of formulas and regulations. As reimbursement costs rapidly escalated, a new protocol for reimbursing hospitals was adopted. In 1983, Medicare reimbursement was changed from the customary fee-for-service reimbursement plan to a prospective payment system. In this new system of reimbursement, medical conditions and diseases are classified into five hundred diagnostic related groups (DRGs). Each DRG category is based on a set of criteria that include age, sex, diagnosis, treatment, expected length of stay, and expected use of hospital resources. A predetermined reimbursement rate is set within each DRG. The use of prospective using DRGs was a cost containment and control measure. Since its inception with Medicare, commercial health insurance companies have adopted similar prospective payment approaches.

Medicare Part B

The second component of Medicare is Part B. Part B covers physician care, physician-ordered supplies, outpatient care, durable medical equipment, ambulance services, and care provided by various other technical medical professionals. Until 1992, physician reimbursement under Medicare Part B was calculated based on claims submitted by individual physicians deemed "reasonable and customary." After 1992, reimbursement was based on an index of resource-based relative value (RBRV). The index was developed by calculating and comparing the amount of work performed, practice expenses, and malpractice insurance costs. RBRV was also a measure designed to contain and control costs.

Medicare Modernization Act

In December 2003, President George W. Bush signed the Medicare Modernization Act (MMA) into law. This landmark legislation had two important provisions. First, it allowed the entrance of commercial health insurance plans into Medicare (Medicare Advantage, or Medicare Part C). Second, MMA established a prescription drug plan for all Medicare enrollees. This is known as...

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