This article is an extract from GTDT Healthcare Regulation 2024. Click here for the full guide.
Healthcare in America is big business. With annual expenditures in 2021 topping US$4.5 trillion, healthcare spending consumes 18.3 per cent of the US gross domestic product. More than half of personal healthcare expenditures in the US are subsidised financially by the public sector, which makes government a key policy actor.
The US healthcare system
The organisation, financing and control of US healthcare is a major policy driver with funding, delivery and access shared among federal, state and local governments and a diversity of private actors, each with overlapping spheres of influence and roles as insurers, financiers, purchasers, providers (ie, hospitals, medical practices, laboratories, post-acute care providers, etc), innovators, researchers and regulators of healthcare.
The US Constitution established a federal system of government where power is distributed between the national (federal) government and states with local governments exercising powers delegated to them by their state. The structure of the healthcare system largely reflects the allocation of government responsibility and facilitates the adaptation of healthcare policy to local preferences and needs.
The US health system is not solely reflective of government structure and interests, but also integrates into it, the private, entrepreneurial nature of corporate financing through investment in new ways to deliver care, innovations through life sciences and technological development and both public and private financing of significant medical research. Market competition plays a strong role in the development of healthcare organisations (eg, physician practices, hospitals, skilled nursing facilities) and the allocation of healthcare resources throughout the US. As a result, this public–private balance (or imbalance) adds to the administrative complexity of the US health system and associated high costs.
Right to healthcare
The US Constitution does not explicitly guarantee the right to healthcare and the US does not have a national health insurance system. Thus, the majority of Americans access healthcare coverage through private commercial plans or public programmes (notably Medicare and Medicaid). Private health insurance coverage continues to be more prevalent than public coverage, at 66 per cent and 36 per cent, respectively. Employer-sponsored commercial health plans are the dominant form of coverage in the US.
How Americans access healthcare coverage
Employer-sponsored health plans
The majority of working-age Americans access health insurance coverage for themselves and their families as a benefit of employment. Such plans provide medical coverage for a range of inpatient, outpatient and ancillary healthcare services for full-time workers and their families. However, the breadth of this coverage is largely uneven, because employers do not pay the full cost of employee health insurance premiums. As a consequence, countless workers contribute to the cost of their employer-based coverage that can result in significant out-of-pocket outlays per year. Further, variability in employer-sponsored insurance coverage is closely associated with employer size. For example, according to the US Bureau of Labor Statistics, 47 per cent of employers with fewer than 50 workers offer health insurance coverage compared to 93 per cent of employers with 50+ workers.
In response to the gaps in coverage produced by healthcare as an extension of the employment relationship, Congress enacted various laws aimed at making healthcare coverage, benefits and services more accessible for certain population groups. According to US census data, government-funded healthcare programmes provided coverage for 36 per cent of the US population for some or all of the year in 2021. Such actions have not, however, achieved universal healthcare coverage, and high out-of-pocket costs continue as a burden for many of the insured.
With a total enrollment of some 64 million beneficiaries, Medicare is a federal social health insurance programme that finances the delivery of covered healthcare services for individuals aged 65 and older, certain disabled persons, persons with end-stage renal disease and those with amyotrophic lateral sclerosis (ALS), and provides substantial financial support for medical education, teaching hospitals and safety net hospitals. Medicare covers a wide range of medical services, including care provided in hospitals and skilled nursing facilities, hospice care, home healthcare, physician services, physical and occupational therapy, outpatient prescription drug benefits and other services. The Centers for Medicare and Medicaid Services (CMS), a subagency of the US Department of Health and Human Services (HHS), administers oversight of the Medicare programme that has established a national standard of care for US healthcare facilities and laboratories. Eligible persons enroll in Medicare through the Social Security Administration.
Medicare consists of four parts, with each part covering specific services: Part A, Hospital Insurance (covers inpatient hospital and, skilled nursing facility stays, and hospice and some home healthcare); Part B, Medical Insurance (covers physicians, outpatient care and other medical services not covered by Part A]; Part C, Medicare Advantage (bundled benefits (typically Parts A, B and usually Part D) provided by a Medicare-approved private managed care plan]; and Part D (voluntary outpatient prescription drug coverage offered by a separate Medicare-approved private plan or included as part of a Medicare Advantage plan).
Medicaid is the nation’s public health programme for low-income and disabled persons who meet certain income requirements to apply. Administration of the Medicaid programme is left to each state, as long as the program meets certain basic federal guidelines managed by CMS. Participation in Medicaid is voluntary and 100 per cent of states, the District of Columbia (DC) and US territories participate in the programme. Eligible persons may apply for Medicaid coverage through their state of residence and Medicaid enrollees must recertify eligibility and re-enrol in the programme on a semi-annual or annual basis, depending on their state of residence.
Commonly referred to as the ‘workhorse’ of the nation’s healthcare system, Medicaid has evolved into the nation’s largest public healthcare insurance programme by total enrollment (76 million). Medicaid covers primary and acute care services and long-term care services and supports for certain low-income adults, children, the elderly and disabled. It also covers nearly 50 per cent of all live births, 60 per cent of persons living in nursing homes and 12 per cent of the disabled. Medicaid is the largest payor for HIV care and the only major source of financial assistance for Alzheimer’s. One in three children receives healthcare coverage and benefits through Medicaid.
While states are required to cover certain populations and benefits, they may also cover optional populations and services, and this accounts for the substantial variation in Medicaid programmes across the states. Within parameters set by federal law, states have certain flexibilities to establish their own payment rates for services provided by hospitals, physicians and other medical care providers. These may include payment for benefits directly by the state programme, or through outsourcing the delivery of care and payment to healthcare plans, or both. Although states are required to make additional payments to hospitals that treat a disproportionate share of low-income patients (Medicaid DSH payments), low provider payment rates (and thus, low provider participation rates) remain a perennial Medicaid policy concern.
Children’s Health Insurance Program (CHIP)
Jointly funded by the federal government and states, CHIP provides low-cost healthcare for children in families with incomes too high to qualify for Medicaid but too low to afford private insurance coverage. CHIP is a block grant programme that requires periodic reauthorisation and funding. The federal share is subject to an annual cap determined by CMS, and states may limit enrolment and establish programme coverage waiting periods. CMS administers and regulates the federal portion of CHIP. Eligible persons may apply for CHIP coverage through their state of residence.
Affordable Care Act
Enacted in 2010, the Affordable Care Act (ACA) comprehensively reformed the US health insurance market by increasing coverage options for the uninsured. Thus, outside of employment, individuals may purchase comprehensive medical coverage from private plans through the health insurance marketplace established by the ACA, where eligible persons can qualify for premium subsidies. The ACA has been the subject of numerous legal challenges and several decisions by the US Supreme Court. Notably, the Court’s June 2012 ruling in National Federation of Independent Business (NFIB) v Sebelius made Medicaid coverage expansion for low-income adults optional for states, 567 U.S. 519 (2012). Currently, 31 states, DC and three US territories (Guam, Puerto Rico and the US Virgin Islands) have expanded Medicaid programmes.
Immigrants with qualified non-citizen status (ie, lawful residents, asylees, refugees, etc) may be eligible for premium tax credits and other savings through the health insurance marketplace established by the ACA, and are generally eligible for coverage through Medicaid and CHIP.
Other public programmes
The federal government also provides comprehensive coverage for healthcare services for active duty service members and families through TRICARE, military veterans through the US Department of Veterans Affairs, and for American Indians and Alaska Natives through the Indian Health Service.
Emergency healthcare and the uninsured
Federal law primarily governs access to emergency services. Medicare-participating hospitals (encompassing almost all hospitals in the US) with dedicated emergency departments must meet the emergency needs of all patients regardless of a patient’s ability to pay for the services. The source of this obligation, the Emergency Medical Treatment and Active Labor Act of 1986, requires hospitals to diagnose and stabilise conditions that constitute an ‘emergency medical condition’, including a patient in active labour.
Currently, 91 per cent of Americans have some form of healthcare coverage although high out-of-pocket costs create barriers to healthcare services for many. While the overall uninsured rate hovers around 9 per cent, it deviates widely across the states. According to recent surveys, the majority of uninsured persons are from low-income families with at least one full-time or part-time worker. Most work for employers that either do not offer healthcare benefits, or the cost of the benefits offered was too high. Recent HHS statistics show the uninsured rate for non-citizens is 30.6 per cent. The federal government publishes and updates an exhaustive resource on coverage options for the uninsured.
The price of healthcare
Healthcare in the US is very expensive with per capita spending the highest in the world, topping out at US$13,000 in 2021. The price of healthcare services varies with the type of insurance coverage. In the commercial insurance market, health plans and providers negotiate pricing for covered items and services that providers agree to accept in exchange for anticipated patient volume. Largely dictated by market conditions, negotiated prices are typically higher than what Medicare, Medicaid and CHIP pay and vary widely within and among geographic areas. By contrast, prices are administratively set for public programmes through laws and regulations. Self-pay and uninsured persons (ie, those without any form of health insurance coverage) typically pay significantly more for healthcare items and services because they cannot access discounts set by government nor rates negotiated by commercial payors.
How the US finances healthcare
The US healthcare system is generally financed through one, or a combination of individual or employer tax credits or deductions; federal, state or local government revenue; individual or group premiums paid to insurance plans; and individual out-of-pocket expenses.
Employer-sponsored insurance coverage is financed through a combination of employer and employee contributions with the employer’s contribution subsidised by federal tax credits. Persons insured by commercial group and individual health plans pay a monthly premium for coverage and the full cost of healthcare up to a yearly deductible for covered medical services and prescription drugs. Costs that routinely count toward the deductible include doctor visits, hospitalisations, surgical procedures, medicines, lab and medical tests. The deductible for in-network services (ie, services by providers that contract with the health plan) is substantially less than for out-of-network services. A fixed amount (copay), or a percentage of the cost (coinsurance), may also be required at the time of service, which may (but not necessarily must) be applied to the annual deductible.
Part A (Hospital Insurance) is financed through payroll taxes. Part A benefits are paid out of the federal Medicare Hospital Insurance Trust Fund, which is projected to be fully depleted in 2028. Medicare Part B (Medical Insurance) and Part D (outpatient prescription drug benefit) are financed with beneficiary premiums and general revenue, so insolvency has not been an issue. Medicare Advantage (Part C) plans are funded through a combination of general revenue, beneficiary premiums and payroll taxes.
Medicaid is a means-tested entitlement programme that is jointly funded by the federal government and the states. The federal government’s share for most Medicaid expenditures is called the federal medical assistance percentage (FMAP). Determined annually, the FMAP is based on a formula that provides higher reimbursement to states with lower per capita incomes relative to the national average. The formula is intended to reflect states’ differing abilities to fund Medicaid from their own state revenues. Medicaid funding is largely dependent on state appropriations and is well known for paying less than the cost of care to providers.
CHIP is jointly funded by the federal government and states under a formula that is tied to a state’s Medicaid FMAP. States have adopted varying thresholds for CHIP eligibility and varying payment structures. The federal share is subject to an annual cap that is determined by CMS, and the states may limit enrolment and establish programme coverage waiting periods. CHIP is almost fully outsourced by states to third-party insurance companies to administer and payment for services is negotiated largely consistent with private managed care contracts.
The uninsured and underinsured
Non-elderly persons without health insurance coverage and the underinsured, whose healthcare benefits fail to adequately cover all of their medical expenses, are largely left to pay for medical services out-of-pocket, which can quickly leave them with a mounting medical debt they may never be able to pay. As a consequence, unpaid medical expenses are the leading cause of bankruptcies in the US.
Since payment is largely negotiated and subject to competition, and because providers also deliver services that are unreimbursed or underpaid, private commercial contracting and financing is structured to shift costs to employers and commercial payors. And this often leads to lack of transparency in healthcare financing and confusion concerning pricing by consumers of healthcare services.
How the delivery of healthcare is structured in the US
The delivery of healthcare is through private or public hospitals and other healthcare facilities, providers, physicians and clinical practitioners. Each are subject to individual state licensure requirements and, in most cases, Medicare certification standards.
How providers are reimbursed for healthcare services
Both private payors and public programmes purchase healthcare services from providers. Commercial payors reimburse providers under a contracted rate that may vary considerably among other insurers and providers. Although commercial rates are largely unregulated, the Medicare programme substantially influences the benchmarking of commercial payor rates with regard to maximum payment levels, rate modifications and changes in market characteristics. Reimbursement for healthcare services is administratively complex, with determinations based on eligibility, coverage, provider type, facility, geographic area, payor involved and other factors.
Medicare uses different methodologies to reimburse healthcare providers based on the service provided, and Congress has made updates and changes to these payment systems over time. The majority of US hospitals are generally paid according to the Medicare prospective payment system (PPS) formula that reimburses a pre-determined, fixed amount for specific services derived from a classification system that has been developed for that specific site of service in that hospital. Since the implementation of PPS in 1983, a number of similar Medicare classification payment programs have been developed for hospital outpatient, home health agencies, hospice, inpatient psychiatric facilities, inpatient rehabilitation facilities, long-term care hospitals and skilled nursing facility services.
Providers may receive certain supplemental payments from the Medicare and Medicaid programmes if they serve a disproportionate share of uninsured individuals, participate in certain value-based reimbursement models and/or provide graduate medical education.
Physicians are paid according to a fee schedule of more than 10,000 physician services. Items and services provided in hospital or outpatient settings are typically more expensive than when provided in a physician’s office.
Third-party payors have begun to shift to value-based reimbursement, which provides incentives for lowering costs while maintaining or improving quality care through bundled payments and pay-for-performance programmes. Groups of providers are also forming accountable care organisations that accept responsibility for the quality and cost of medical services for specific patient populations.
Widely acknowledged as one of the most complex health systems in the world, US healthcare is a mix of public and private delivery models, where the dual influence of private capital and public goods create a continual shifting and sharing of healthcare roles and responsibilities among government and the private sector. While the organisation and structure of US healthcare produce significant market innovations and improvements in care, nearly 30 million Americans remain uninsured while millions of others are underinsured.
Equally complex is the practice of health law in the US, where health system concerns necessarily involve the expertise of lawyers knowledgeable on the multitude of laws and regulations that govern the US healthcare industry, many of which are addressed in Getting the Deal Through: Healthcare Regulation 2024.