If you are responsible for the care of an elderly family member, beware of a new development. Medicare is increasing pressure on hospitals to admit patients under "observation status." It appears their goal is to shift hospital costs onto patients and third parties. According to AARP, when a patient is classified under "observation status," the hospital may provide similar services. However, they are not compensated under Medicare Part A; they are compensated under Part B.

Compensation under Part B means the patient's family could be in for a surprise. Unless they pre-purchased additional insurance, the patient assumes financial responsibilities for hospital charges. Those charges could be significant.

There is more. The decision to admit under "observation status" reaches beyond the hospital. It means the patient will be denied Medicare coverage for any subsequent skilled nursing facility expenses, even if those services were ordered by the the hospital or the patient's doctor. Under these circumstances, patients become financially liable for most of facility's daily rates and charges.

Most thought they thought they were insured for these expenses. They are surprised by by the hospital's admission decisions. They are also surprised by consequential financial obligations.

To learn more, read AARP's bulletin. In addition, google "Observation Status" (keep the quotes).

David Lillienfeld writes:

Back in the early 1990s, 25 percent of all health care expenditures in the US occurred during the last year of life. It is now up to 30 percent.

Medicare and Medicaid was 36% of health care spending in 2011, though the same fact sheet lists government expenditures as 28 percent of spending. Not included in these data are the health care expense coverage for uniformed military personnel, their dependents, those in the VA system, and those in the federal government. If those were included, I'm sure the proportion of health care funded by the federal government would increase.

Of note is that not all of Medicare is spending on the elderly. Medicare also covers those persons with end stage renal disease (ESRD). There are already at 950,000 of such patients in the US, and while the incidence rate has leveled out (probably reflective of better blood pressure control, reduced rates of renal arterial atherogenesis, and better control of early and mid-stage Type II diabetes mellitus (most commonly secondary to obesity but not exclusively so)), the prevalence of the disease will likely continue to increase.

Individuals with ESRD receive regular dialysis treatments. These are time-consuming, sapping of energy, and expensive. The only way to stop dialysis is with a kidney transplant. Medicare will cover the costs of a transplant, but it will not cover the cost of the immunosuppressive medications afterwards. A not uncommon experience is for the patient to receive the transplant but not be able to afford the immunosuppressant drugs, and the transplant is consequently rejected. The patient then returns to dialysis which is—you guessed it—still covered by Medicare, until the next transplant. (If you wonder why DeVita is a low risk stock, at least in terms of demand for its product, this description provides an answer.)

One of the complications of ESRD is anemia, correctable by erythropoietin. Amgen sells this biological and has, courtesy of Medicare coverage, built a $4+ billion product. Unless the FDA allows generic biologicals, that franchise is pretty safe. It's worth remembering that generic biologicals are not as easily produced as pharmaceutical ones, so some caution is in order.

I don't know what proportion of Medicare expenditures are for ESRD care, particularly for those under 65 years of age, but I can't imagine it to be trivial, and it is growing. As with coronary bypass surgery (which at one time Medicare did not cover), however, the projections of likely expenditures has been eclipsed by the actual amounts spent.

One would like to see efforts at identifying best practices funded, but that idea has been repeatedly shot down.

With health care spending at 17-18 percent of the economy, it is a substantial industry. Trying to restrain its continued growth will be challenging on many levels. There is little political will/leadership to do so.


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