health service financing

Week 7: Health Services Financing

Unit Objectives

After completing this unit, you should be able to

  • define moral hazard, adverse selection, and cost-shifting
  • identify the major public programs for the financing of health care
  • compare and contrast Medicare and Medicaid
  • list and describe the four sub-programs of Medicare
  • describe different reimbursement approaches for health services

Unit Lecture

When asked how health care services are paid for, many of us think immediately of health insurance. However, we typically don’t think about the dynamics behind health insurance or the various types of programs through which it is delivered. At its most basic level, health insurance is a tool for mitigating risk. An individual purchases health insurance to mitigate the risk of having to pay an enormous medical bill in the event of sickness or injury.

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Those who provide health insurance—insurance companies—also work to mitigate risk, albeit from the other side. They attempt to create a risk pool containing a large number of healthy people to offset the expenses accrued by those who do get sick or injured. Premiums, the fees paid for ownership of health insurance, are used to subsidize the cost of the health care provided to those who use the insurance.

Factors that insurance companies need to be mindful of include moral hazard, whereby an insured individual is more prone to seek care than if he or she were paying the medical bill him- or herself; and adverse selection, whereby insurance is mainly purchased by those most in need of it. As with any financial enterprise, if the costs of providing the product or service exceed the revenue, the company goes out of business.

There are several types of insurance programs, both public and private. Together, these programs cover not only individual health services, but public health services, research, and the administration of the delivery and financing of health care in the United States. The majority of public and private expenditures—approximately 81 percent—are directed toward hospital care, provider and clinical services, long-term care, and prescription drug provision (Kovner & Knickman, 2011).

As mentioned in the week 4 lecture, health insurance is a relatively new mechanism for financing health services, and it has grown substantially since the mid-1900s, when only 9 percent of the US population had health insurance (Blumberg & Davidson, 2009). Health insurance can be broken down into private and public insurance.

Private health insurance is primarily employment-based, meaning that individuals receive coverage through commercial health insurance plans for which their employers either pay the premiums or subsidize them, with the employee paying the balance.

Some larger employers choose to self-insure, which means that they administer their own plans and accept the financial risk of doing so. In essence, they act as the insurer of their employees.

Some individuals, either through necessity or choice, opt to purchase their own private insurance coverage through a commercial insurance company or to remain uninsured and accept the risk.

Public health insurance is funded by the government and plays a significant role in the health care system. There are several public programs; two of the most prominent are the Medicare program, created through Title 18 of the Social Security Act of 1935 (SSA), and Medicaid, created through Title 19 of the SSA. Both programs are operated by the Centers for Medicare & Medicaid Services (CMS), a division of the U.S. Department of Health & Human Services (HHS).

Medicare is a federally funded program that finances services for people aged 65 and older, people under the age of 65 who have certain disabilities, and people with end-stage renal disease (CMS, 2014). Medicare has four sub-programs: Part A, which covers hospital inpatient services; Part B, which covers provider services and outpatient care; Part C, an optional managed care plan in which beneficiaries can participate; and Part D, which provides prescription drug coverage.

Medicaid is jointly funded by the federal government and each state government. Consequently, there is variation within the program from state to state in terms of eligibility and benefits. Although the states have a certain degree of control over the eligibility criteria, federal law mandates that coverage be available to individuals in families with an income below 133 percent of the federal poverty level. The federal government also sets nonfinancial criteria, such as that coverage apply to those enrolled in the Supplemental Security Income (SSI) program (CMS, 2014).

Some of the federally mandated services provided by Medicaid include inpatient and outpatient services; surgical dental services; nursing facility services for beneficiaries aged 21 and older; and preventive, diagnostic, and treatment services for children. Information on the impact of the ACA on Medicaid eligibility can be found on the Medicaid eligibility website.

Medicare and Medicaid are not the only publicly funded health programs. There is the Children’s Health Insurance Program (CHIP), which is instrumental in financing health services for uninsured children; the Military Health System (MHS), which provides health services to active-duty and retired members of the uniformed services as well as their dependents; the Veterans Health Administration (VA), which provides care to veterans; and the Indian Health Service (IHS), which provides health services to members of American Indian and Alaska Native tribes and their descendants.

Each private and public insurance program has a unique relationship with the health care providers who participate in that program. Each program also has its own methods of determining reimbursement rates for services provided. This week, we’ll discuss not only the basic dynamics of health insurance, but the various types of private and public insurance, the various reimbursement approaches, and some of the ways in which the ACA will impact the financing of health care in the United States.


Blumberg, A., & Davidson, A. (2009). Accidents of history created U.S. health system. Retrieved January 28, 2014, from…

Centers for Medicare & Medicaid Services (CMS). (2014). Medicaid eligibility. Retrieved January 6, 2014, from…

Centers for Medicare & Medicaid Services (CMS). (2014). Medicare program general information. Retrieved January 6, 2014, from…

Kovner, A. R., & Knickman, J. R. (2011). Jonas & Kovner’s health care delivery in the United States. New York, NY: Springer Publishing Company.

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