Most older people are fairly well protected against the cost of acute care, but not so for long-term care. Fewer than one percent lack any coverage for acute care. About 95 percent are covered by Medicare, which funds roughly 45 percent of personal health care costs 8 for the elderly (see Figure 9. 1 ). Medicare primarily funds hospital-based care, post-hospitalization rehabilitation in skilled nursing facilities, most physician services, hospice care, and limited home health services for homebound persons needing skilled care.

Nearly three-quarters of elders covered by Medicare were also covered in 1989 by at least one private insurance plan and 6 percent by Medicaid, with only 17 percent lacking additional coverage. 9 Next to Medicare, Medicaid is the most important public health care program for the elderly--paying for another 12 percent of their health care expenditures. In addition to providing low-income, low-asset elders with access to a substantial range of acute care benefits, Medicaid is the primary funder of nursing home care and also funds prescription drugs and a limited but growing share of community-based long-term care.

Veterans Administration programs also provide substantial protection for both acute and longterm care needs to eligible veterans, and other publicly-funded health and long-term care benefits are funded through the Department of Defense, the Indian Health Service, and a variety of state, county, and local government programs. 10 Together, these other public programs fund 6 percent of the aggregate cost of health care for elders. Of growing importance, many community-based long-term care services are funded by the Older Americans Act, the Social Service Block grant, and state, county, and local governments a description of how the issue or area of public concern has affected service provision.

The range of available services often includes home health care, homemaker and home repair services, in home and congregate meals, respite care, adult day care, emergency alert systems, telephone reassurance, and congregate housing. 11 While many of these services can be found in most communities, their availability is generally limited relative to the numbers of elders requiring such support. Almost 40 percent of the formal health care of older persons is privately funded, primarily by private insurance and out-of-pocket payments.

The two major private insurance vehicles are individual "medigap" policies and As is true of all insurance policies, the principal goal of Medicare's cost-sharing design was to provide beneficiaries with protection against severe financial loss. Prior to Medicare's passage, few elderly persons could obtain affordable private health insurance. As a result, over a third of all elders who were hospitalized in 1962 spent at least 25 percent of their income on medical care ( Kovar, 1986).

In the words of Senator Edward Kennedy ( 1986, p.11), then newly elected to Congress, "In the dark days before Medicare, senior citizens lived in fear that a single illness could wipe out a lifetime of savings and transform the dream of a comfortable retirement into a nightmare of poverty and despair. " To address this concern Medicare applied the broadest and most generous coverage to hospital care, the source of the largest medical bills. Nonetheless, Congress recognized that because Medicare does not cover all health care costs, beneficiaries could still be liable for financially devastating health care bills.

Thus a provision was included in the Medicaid program that allowed state legislatures to provide additional financial protection by permitting Medicare beneficiaries to spend down to Medicaid eligibility; that is, to deduct medical bills from their income in determining whether they meet income-based eligibility requirements for Medicaid. In states with spend-down provisions, elders with large medical bills can thus, in principle, become eligible for Medicaid benefits even if they are not poor. Control of Program Costs A second goal of Medicare's design was to encourage beneficiaries to use only needed services.

If insurance covered all of the costs of health care, beneficiaries would have no financial incentive to conserve on their use of health services and, indeed, might use services that have costs far greater than the benefits they offer. Thus Medicare, like almost all private insurance, requires that enrollees pay for some of the costs of the care they receive through deductibles and coinsurance. 1 Within each benefit period of Medicare's Part A coverage, which primarily covers hospital care, beneficiaries must pay a deductible roughly equal to the average cost of 1 day in the hospital.

2 For the first 60 days of coverage in a benefit period, there is no coinsurance. Coverage between the 60th and 90th days has a 25 percent coinsurance rate; coverage beyond 90 days has a 50 percent coinsurance. Under Part B, which primarily covers physician services, beneficiaries face a $75 annual deductible and 20 percent coinsurance for each service delivered once coverage begins. Fair Share of Costs for Beneficiaries Unlike private insurance, Medicare's cost-sharing arrangements were also shaped by what were seen as basic principles of fairness, particularly a concern that out-ofpocket expenses for health care be affordable to all elders.

Private insurance premium rates are set to cover the cost of the health care that enrollees use, less coinsurance and deductibles. However, because many elders incur substantial health care expenses, it was generally agreed that if Medicare premiums were set to cover the full cost of Part B services, they would be beyond the financial means of many elders. To avoid this, Congress chose to have elders pay only one-half the costs of Part B coverage through premiums, subsidizing the rest through general federal revenues.

Part A is financed through payroll taxes and has no premium. Over the past few decades, Congress has twice changed the way in which Part B premium rates are set in an attempt to ensure that elders continue to pay a "fair share" of program costs. "Fair" in this context has had two quite different meanings. On one hand, "fair" meant a share that did not exceed the financial resources of the elderly as a group. Concerned that health care costs were rising far faster than elders' incomes, Congress amended the Social Security Act in 1972 to limit the annual growth of Part B premiums to the cost-of-living increases in Social Security payments.

As a result, premiums as a portion of Part B costs fell from 50 percent in 1966 to 25 percent in the mid-1980s. This decline evoked concern over "fair share" in a second sense: that elders pay an adequate share of the overall costs of the program so that younger generations are not asked to pay too much for the health care of their parents. In 1986, Congress changed the criteria for annual charges in Part B premiums and required that they be raised to maintain a 25-percent contribution. HMOs are paid in advance to provide a range of health care benefits, including at a minimum hospital and outpatient care.

For the duration of the prepaid period, enrollees are covered only for those providers affiliated with the plan and those services authorized by the plan. Unlike their counterparts in fee-for-service health care, providers in prepaid plans must work within a budget. This creates an incentive for them to conserve on the delivery of health services. Costs can be contained in a number of ways: substituting less costly for more expensive services, expanding the use of preventive care, better coordinating services to reduce inappropriate utilization and simply delivering fewer services.

Because enrollees are covered only for services authorized by the plan, HMO physicians and administrators have more control over the services beneficiaries use. As a result, HMOs are thought to be better able as well as more motivated to efficiently manage health care services for their enrollees. Apart from these common features, HMOs can take a variety of different organizational forms. Physicians may share a common office building, as do most prepaid group plans (PGPs), or practice out of individual offices, as in independent practice associations (IPAs).

Some plans are federally qualified--that is, their coverages and organizational practices meet certain guidelines established by federal law in the mid-1970s-others are not. Some are operated by a small group of physicians or as physician-consumer cooperatives. Still others are a part of large national or multinational corporate systems.

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