Uploaded by Hendrick Leadz

Health Finance Law OUTLINE

Medicare and Medicaid
Enacted in 1965, together the programs fill critical needs and their roots trace to the U.S.’s
decision to rely on private employer-sponsored coverage arrangement.
Like health insurance systems in other countries, is a compulsory and universal entitlement vesting in
workers covered through the SS system and it rests on a financing base mad of employer/employee
payroll taxes, individual premium payments, and general government financing.
- Enactment Development:
o Although (Part A) the hospitals and after-care in certain situations is compulsory and
financed through payroll taxes, (Part B) physician and medical supplier services
including home health care is voluntary and financed through premiums and general
revenues. Part B’s voluntary structure was a concession to attract the support of
organized medicines which violently opposed the enactment.
o Second, the original law let physicians and hospitals control the payment terms and
lacked any cost control mechanisms to address price, coverage design, or utilization of
 Physician payment was based on their usual and customary fees, i.e., payment
essentially tracked what physicians charged, amounts that were greatly increased
just before Medicare became effective, whihle hospital payments were tied to
their reasonable costs as determined in accordance, with cost principles
developed by Blue Cross and the American Hospital Association.
o The original Medicare law also assured doctors and hospitals that the medical necessity
of care could only be revied by professional peer processes. Medicare costs exploded
during the 1970s leading to the introduction of major payment reforms in physician and
hospital care in the 1980s which slowed the program’s growth rate but didn’t address
underlying dynamic which caused price and volume increases.
- Its financing was modelled after private pensions, its health care delivery was modeled on private
health insurance, i.e., it covers primary services including some specified preventative procedures
and medical care for conditions requiring costly and advanced curative care.
- It does not cover long-term care furnished at home, institutions, or in community settings.
Huge contributor to heath care system – Insures 47 million as of 2010 and provided coverage for
medical and institutional care along with outpatient prescription drugs, added through 2003
o 2008: It accounted for 23% of total health care spending, including 29% of all hospital
expenditures, 21% of total physician services expenditures, and 22% of prescription
drugs spending.
- Conditional Participation: Participation by hospitals/other intuitional providers is conditioned on
compliance with federal civil rights laws such as Title VI (1964 Civil Rights Act), and its been
credited with desegregating hospitals which meant the halt of segregated treatment and exclusion
of minority patients.
- Contributions to health care: its created a sure in hospital growth, tech’ innovation, and advances
in surgical and medical techniques, and in later years, tremendous diffusiof care to outpatient
- Coverage Benefits: Modest compared to big employer-group plans. It offers less in coverage, e.g.,
dental/vision/hearing aren’t covered.
o Leaves beneficiaries exposed to greater cost-sharing levels, even for covered services.
Comparison: in 2007, Medicare covered 74% of health care costs compared to 85% in
large private-employer sector and 83% under Federal Employee Health Benefit Plan
*As patients’ health worsens, Medicare remained limited in value compared to the other
plans, leaving the sickest exposed tot out of pocket costs between 50-100% more than
those incurred by the sickest of large employer group plans.
It is Medicare’s legislative companion and plays a central role in he health care system. In 2010 in
covered 68 million people.
- Operates like health insurance covering people entitled to assistance and acting as a 3rdd party
payere of covered health care services. This structure reflects its fundamental aim to move the
U.S. away from direct financing of the public health care systems in public hospitals and clinics
as the central, segregated means by which poor people get their care. Its also the most important
health care financing source for health care safety net providers like public hospitals and health
care centres.
- The program’s historical connection tto cash-welfare programs has meant coverage of poor noneldery adults who are neither disabled, nor the deeply impoovreished caretakers of minority kids,
historically has been very low; coverage to parents in some states is around 20% of the federal
povertly level. Also, Medicaid has played a large not just for families with kids but also as a
supplement for Medicare coverage in low-income Medicare beneficiary cases, known as dual
- It is the nationa’s single biggest source of insurance and I also hhaas duties borne by not other
player, i.e., in the long-term institutional and community care for kids add adults with disabilities
area; expenditure for these groups account for 2/3 of all program spending.
- It has no pre-existing condition exclusion clauses and no waaiting periods (ddisabled people
qualifying for SS must wait 24 months before meedicare coverage begins). For Medicaid,
enrollment at the point fo health care need is not onlu possible but per federal law, the coverage
can be extended ona retroactive basis, starting up to 3 months before the application ate and so
allows for retrospective coverage of costly procedures.
- Cooperative Federalism Limitation: Like Medicare, it doesn’t have spending contraints built
into law but its biggest constraint still is that it has a structure of cooperative federalism, i.e., its
administered and partially funded by states and that federal spending is ttieed to Medicaidd, and
many states aelected over years to cover relatively fewer people, to place harsher lmitts on
benefist and keep provider payments low.
o Medicaid makes up a huge chunk of of state budgets. The ederal/state tensions inherint
in the structure are huge and so reflecst state concerns over the extent of federal
requirements relating to coverage and expenditures. Still, Medicaid is the largest source
of federal grant funding to the states, making it a central feature of state economies.
o Its rules for coverage have hihstorically have been far broadedr than private insurance
and Medicare. This reflects the deep impoverishment and poorer health of beneficiaries.
Coverage ergo spans not only treatments and services linked to preventative and primary
health care and acute probems’ treatments, but also long-teerm iinstutionial and home
and community sercvicse for people with seere activitu limitationis who require ongoing
health care to maintain theiri hheaelthh, gain or preeservee functional capacbilities, or
avert sserious diminiution in health status.
An Evolving State Regulatory Framework
Paul v. Virgina (1868) USSC: USSC held states haave power tto regulate insurance conraxcts
(issue being whether state could require out of sate insurance agens doing business insate o pos
security bons), and tha insurers dodn’ enjou exemption from statet regulation either because they
engage in interstate commerce or are protect by Article 4 Privileges and Immunities Clause.
U.S. v. Soutth-Easstern Undewriters Ass’n (1944) [Overrulede Paul v. Virginia]: Resultedd in
Sherman Antitrust Act Being applied to insurance industry.
o Congress Response: Given the potential evisceration of state authority from this, they
implemneted the McCarran-Ferguson Act (15 USC §1012) which declared business of
insurance should continue to be subject to the laws of the several states which relate to
regulation/taxation of such business. It also provided tha federal regulation would be
applicable to the businesses of insurance o the exten such business is not regulated by
state law. (The Act preserved primacy of state law sxceept to the extent state law was
silent on an issue, then EERISE pre-emption cases came in. leading congress to sharply
limit state power to regulate employer-sponsored group health plans).
Purposes of State Insurance Laws:
o 1) States attempt to ensure insurers’ solvency through requirements of licensure,
capitalization, opearattioons and management (including conrol of experience raing and
medical underwriting practices) and via other methodsd to ensure financial stability.
Firms have o have adequate payout reserves an dstate agencies also have authority to
order rehabilitation or liquidation of firms with insufficient reserves.
o 2) Regulating insurer conduct in the market, prohhbiting overreaching, undairness, rau,
and edceptiive ractices. Laws require agents’ licensure an dregistraitoin and prohibit bad
sales tactics nd mandate ffairness in claims processing. States also approve form oof
salees contracts and oftetn give appeals processes to ensure aappropriaate enforemecent
of insurance contracts. Insurance edpartmens aacn investigates and impose
penalsties/issue cease and desist orders.
o 3) States regulate access to insurance and the content of coverge: State laws defined who
must be allowed tot access individual and group policies, when coverage cn be restricted
via pre-existing coonddition exclusions and waitin periods, subject to federal restrictions,
and what benefits must be covered in individual and group markets like coverage
treattmenst/processsdures for mental illness/substance abuse, maternity care,
prescriptions, and other services. Sme states limit insurers’ ability to vary premiums in
relationi to characterisstics of certain individual or small0group policy ohlders, i.e., age,
genders, health status, or prior claims experience.
 Limitations to States’ Powers:
 They exercise their powers moderately especially because insurance
companies operate on a multi-national level and so they have political
 State insurance commissions often don’t have resources to regulate
wisely or engage in enforcement. The NAIC has been attempt to remedy
this as it allows state authorities to pool ddata/ideas and share model
 Fearing the companies may leave if states are over-demanding:
o Many states hhistorically set insurers’medical loss ratios –
proportion of premium that must be spent on payment of
medical claims and permissible admistration costs, very low
so insurers can reap large profits compared tto the claims paid
 Patient Protection and Affordable Care Act: Established
a federal floor of 80% for medical-loss ratios in the
individual market (effective 01/2011) before the Act’s
universal coverage provisions commence (01/2014).
 Limitations of State Laws:
They’re weak and give lots of discertioni to he industry. E.g., Per
regulation of group health insurance market, more tthan 35 staets require
health insurers to cover childhood immnuizations to some dedgreeebut
no state required insurers to cover the full complement of childhood
vaccines recommended by the CDC for kisd under 18.
Health Insurance Portability and Accountability Act (1996) [HIPAA]: Congress’s first
significant effort to directly address insurers’ tendency to engage in risk selection (against poor
risks). HIPAA provided a minimum federal standard barring discrimination based on health status
at the point of sale, enrollment, and renewal.
o It provided an exclusion of coverage under employer plans for pre-existing conditions
couldn’t look back more than 6 months. Since in some sense virtually conditions except
trauma and infection could have pre-existed, many insurers denied coverage in many
types of cases. It didn’t mandate any other minimum insurance coverage or design. (See
Title XXVII of Public Health Service Act 42 USC § 300gg-1.)
 It was a breakthrough in prohibiting insurers from rejecting small employer
groups/singling employees out for exclusion from the group/refusing to new
coverage based on costs/claims experience.
 Portability Protection: It made this so people were continuously covered by a
group plan/other creditable coverage type allowing people to move from one
employee group to another, or from group coverage to individual insurance
market, without subjugation to long waiting periods or existing condition
 Gap in Coverage <63 days: For example, if people lost jobs and couldn’t
afford their employers plans. If they got a job after the 63-day period,
they’d be subject to pre-existing illness conditions and waiting periods.
 HIPPA Drawbacks: No regulation on premiums and so people faced with higher
premiums couldn’t afford them anymore. So renewability was guaranteed only a
formal sense.
General State and Common Law Applicability to Insurers:
o States have rules for interpreting individual v. insurer disputes which build on long
standing CL principles made to address the unequal bargaining power.
 Contra Proferentem: A significant principal where ambiguities under insurance
contracts are construed against the drafter.
 Bad Faith Breach of Contract: Applied by state courts to injury cases in insurance
industry allowing recovery f liquidated contractual damages (usually amount of
health care withheld) AND compensatory and punitive damages for tortious
conduct if claimant can show insurer’s failure to in good faith via refusing
without proper cause to compensate for a claim.
The Employment Retirement Income Security Act (1974) [ERISA)]
- Enacted to address crisis in private pensions, it establishes a limited regulatory framework for
group health benefit plans sponsored by private employers
- It sets the standard for disclosure, plan administration, and claims review for benefits.
- Amended over time to add coverage requirements related to small groups of people or discrete
issues, i.e., moms and newborns threatened with premature hospital discharge, women with breast
cancer, genetic non-discrimination, continuation coverage (aka COBRA coverage) for certain
qualified people, non-discrimination and portability requirements, and mental health parity.
- Pre-emptive effect: This source of its great impact.It pre-empts a lot of state insurance an other
state laws that create legal remedies for people injured from an insurer/health plan administrator’s
bad faith or negligence.
Pre-emption beyond ERISA: HIPAA provides minimum standards for nondiscrimination and portability in insurance coverage otherwise subject to regulation,
Medicare precludes application of state insurance laws to insurers participating in
Medicare, Medicaid sets conditions of participation that states have to meet.
Despite McCarran Ferguson Act’s preserving state regulatory power over insurance, federal
law has been taking much power back now given uneven and dysfunctional state regulation.
Metro Life Ins. Co. v. Mass (USSC) (1985): USSC made two basic classes of employer
sponsored group health plans:
o 1) Insured Plans: Employers who purchase state-regulated group health insurance
o 2) Self-Insured Plans: Employers self-insuring and usually using insurance companies
just as third-party administrators.
 Self-insured plans are exempt from state laws regulating insurance since they
don’t involve purchasing from state-regulated insurance products. Still, ERISA’s
exclusive remedies completely pre-empt state law remedies that would otherwise
be available.
Escalating Costs and New Models of Health Insurance
Thee growing cost of public/private insurance and absence of uniform mechanisms to control them led to
every payer for itself an so Congress stepped in to halt Medicaid’s growth by eliminating requirements
for universal state implementation of full coverage up to federal limits. It also introduced utilization
review into Medicare and pressed states to follow suit in Medicaid.
Congress Reforms to Hospital and Physician Payment Systems to Curb Medicare Costs:
o 1970s:
 In 1972, Congress made provisions to assure Medicare payment was given only
for care ACTUALLY medically necessary.
 Carter’s “All-Payer Rate Setting” Experiments: one to spur rising hospital
care costs by enabling states to set those rates for private insurers AND
Medicare. Purpose was to curb increasing costs while halting cross-payer costshifting via tools that treated hospitals effectively as public utilities and
established rates they could charge all payers. (By 2011 only Maryland uses
 National Health Planning and Resource eveelopment Acct (1974) (Amd.
1979) (Repealed in 1986): Introuced formal planning procedures into the
development/growth of new health care resources by establishing state and local
health planning agencies under federal oversight and with power to control
capital incestment, expansioin, and with a focus on hospital an major capital
eeequipment purchasese. Repealed in part due to intense industry backlash.
 Prepaaid Pracctice Plans (Health Maintenanec Organizations) [HMOs]: In
1973, Congress enacted law to spur growth with HMOs purposed to integrate
financing and health ccare inito hybrid entities that vi greaetr climical and
financial integration could both insure the population while managing care
through greater focus on preventieon and efficiencies.
 The HMO model was aa new term for the same integration championed
by the CCCMC with ties to insurance and health care. To spur
development of HMOs the law required employers of 25+ to offer
federally qualified HMOs as an optioini where they existed.
o By 1981 <10% of employed population was ienrolled in
HMO/other prepaid group practice arrangement. Inter alia,
physician opposition to intermediary control making HMOs that
met federal qualifications was tough.
o Insurance Response: First, health care providers then faced with
cutbacks just raised prices on less regulated market areas.
Insurers responded to cost control demand with ne coverage
 Utilization Review: This became a feature in private
insurance and was initially retrospective (reviewing and
denying payments after treatment was given) but courts
sometimes truck it down for bad faith breach of implied
covenant of good faith/fair dealing in insurance
See Prof. Einthoven’s remarks on p. 212.
 By 1981 <10% of employed population was enrolled in HMO/other prepaid
group practice arrangement
 Replacing the Blank Check Approach: In 1982, it enacted law replacing
Medicare’s retrospective cost-based payment systems for hospitals (blank check
approach, i.e., essentially paying them for costs incurred in giving care without
accounting for efficiencies like early discharge, reduced procedure
volume/intensity, or prices).
 Prospective Payment System (PPS): Used to redress the retrospective
blank check method by paying hospitals flat inpatient services rates tied
to treatments for certain conditions. It also revised Medicare’s physician
payment plan formula replacing usual and customary rate used by
public/private insurers and instead tied it to physician charges.
o Resource Based Relative Value Scale: Replaced the PPS
system by setting fees for primary AND specialty care.
1990s [Managed Care Revolution]: A response to the twin issues of quality and cost. It
involves large intermediaries offering insurance/or plan admin’ services to self-insuring
employers contracted with provider networks, whose selection and practice they oversee,
in exchange for the promise of patients and revenues.
 Dominant feature is combining financing and care within a single enterprise
where coverage is conditioned in whole/part on use of a network, while
providers’ access to insured patients depends on their participation and
acceptance of the insurer’s control over access to coverage.
 Early Years: It seemed to control cost as the model spread across employer plans
AND Medicaid, and as plan administrators were able to get price concessions
from hospitals, physicians, and other providers in exchange for network
membership and volume.
 Mid 1990s: premiums declined a bit, but the managed care shock was a
temporary thing. One reason is because congress and state government enacted
“patient protection reforms” which had laws aimed at preventing the arbitrary
exclusion of providers from networks (aka any willing provider laws), laws
establishing external review of insurers’ treatment decisions, and laws requiring
disclosure of information about coverage and care. Otther factors related tto this
were managed care coinciding with and enhancing the normal cycle of insurance
of premums rising nd falling cyclically. Preemiums wre sometimes seet too high
relative to lossese for example. In thee next wav of thee cycle, premiums might
be set to low compared to actual losses. Firms will set low premiums when
expected losses are low and their profits are high to gain back market share, i.e.,
loss leading. The managed care shock coincided with downward part of the cycle
where premiums fall or don’t raise as fast, but the initial price discounting by
providers outran actuarial predictions. This accentuated the downward cycle and
unexpectedly high profits led to aggressive lowering of premiums to gain market
share. The combine effects didn’t eliminate the cycle but just elongated it. The
upward trajectory last longer and was even higher than normal. So, the
downward swing during the managed care period that occurred didn’t prove
managed care could hold down price or utilization over longer terms, but showed
the cumulative effects of the ordinary cycle and the initial price shock that the
introduction of the managed care caused.
 Managed Care’s effects wearing off: Providers eventually find a way
to maximize income within a new set of rules. Although there were
deep discounts in the beginning by all providers, resistance to it by
physicians and patients was too much for tightly managed, exclusionary
networks, to be socially and politically sustainable.
 Transition from Managed Care: Eventually the system became more
loosely structured that partially shieled payres from by shifting it
ddireectly onto patients via iscounting provider networks, along
withtigght coverage rules, hihgh cost-sharing, and exposure to balance
billing for going out og network. But with cost-sharing rising, things
might bee swinging back as insurers hhave agains started emphasizing a
moree managed approach promising betteere coverage for acceptance of
mmoree utilization controls and direct control over procider practice.
 Overall: Though managed xare hasn’t held own coss but structural
changes it wrought like competitive networkeds selecte and managed by
intteermediaries and tighteer prospective utilization controls, reflect the
funeamntal shift in the structure of US healtht insurance. TThese two
structural reforms now amped up by rising point of servcce cost sharing
are here to stay.