Health Care Economics and Financing

2009

Daniel B. McLaughlin

The legislative process - UpdateHouse Energy & Commerce

House Ways & Means

House Education &

Labor

Senate HELP

Senate Finance

Full Senate

Full House

Conference Committee

Old & New

Agencies

Current Issues

• Individual and employer mandate• Subsidy levels• Funding

– From Medicare to Private subsidies in exchange

– Tax on “Cadillac” health plans– Medicare Advantage – reduced benefits

• Public Options – Co-ops in the exchange

When will reform be signed into law?

1 2 3 4 5 6 7

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50% 50%

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1. Before October 31

2. November 1 – 15

3. Before Thanksgiving

4. Between Thanksgiving and December 16

5. Before Christmas

6. Next year

7. Never

Health Care Financing

“You know – in health care its not the money, it’s the money”

– famous health care executive

Objectives

• Overview of health care financing principles in a free market economy

• Use of these principles in policy development• Review 5 Important issues in Health financing

policy

Policy Topics

• Payment reform

• Managing consumer demand for health services

• Health Insurance

• Moving consumers to healthy lifestyles

• Technology diffusion and cost management

General Financing Model

Government

Productivity

Personal Assets

Employers

Taxes

Insurance

IndividualHealth

Med

ical

Car

e

Employers Remain Primary Sponsor of Coverage Distribution of 307 Million People by Primary Source of Coverage

EmployerDirect164m 53%

Uninsured49m16%

Medicare39m13%

Medicaid42m14%

Medicare41m13%

IndividualDirect14m 5%

EmployerDirect55m18%

Total Employer 164m (53%)Total Individual 14m (5%)

Source: The Lewin Group, The Path to a High Performance U.S. Health System: Technical Documentation (Washington, D.C.: The Lewin Group, 2009).

Distribution of National Health Expenditures, by Type of Service, 2007

Note: Other Personal Health Care includes, for example, dental and other professional health services, durable medical equipment, etc. Other Health Spending includes, for example, administration and net cost of private health insurance, public health activity, research, and structures and equipment, etc.

Source: Kaiser Family Foundation calculations using NHE data from Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group, at http://www.cms.hhs.gov/NationalHealthExpendData/ (see Historical; National Health Expenditures by type of service and source of funds, CY 1960-2007; file nhe2007.zip).

Physician/ Clinical Services 21.4%

Hospital Care 31.1%

Other Personal Health Care

12.7%

Nursing Home Care, 5.9%

Prescription Drugs10.1%

Home Health Care, 2.6%

Other Health Spending 16.2%

Relative Contributions of Different Types of Health Services to Total Growth in National

Health Expenditures, 1997-2007

Nursing Home Care4.2%

Home Health Care2.2%

Other Personal Health Care

11.5%

Hospital Care29.7%

Prescription Drugs13.4%

Physician and Clinical Services

21.3%

Other Health Spending17.7%

Notes: Percentages may not total 100% due to rounding. Other Personal Health Care includes, for example, dental and other professional health services, durable medical equipment, etc. Other Health Spending includes, for example, administration and net cost of private health insurance, public health activity, research, and structures and equipment, etc. Source: Kaiser Family Foundation calculations using NHE data from Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group, at http://www.cms.hhs.gov/NationalHealthExpendData/ (see Historical; National Health Expenditures by type of service and source of funds, CY 1960-2007; file nhe2007.zip).

1.1. Scarcity and Choice

• Limited resources but unlimited wants

• Must allocate resources among competing objectives

• Implications– Resources used for health can not be used

elsewhere– Can not have everything we want – hence

tradeoffs

2.2. Opportunity Cost• Everything and everyone has alternatives• Time and resources can only be used once• Any action results in another action not

taken – “Opportunity cost”• Implications

– Medical care involves costs as well as benefits– E.g. CT scan diminishes funds available for

immunization

3.3. Marginal Analysis

• Decisions are made at the margin of cost/benefit• Incremental costs can provide incremental

benefits• Implications

– When marginal costs are low services are treated as “free” – e.g first dollar coverage

– Balancing of marginal benefit with marginal cost will result in optimal resource allocation (e.g correct generic vs. formulary drug for hypertension)

4.4. Self-Interest

• People pursue their own self interest

• People respond to incentives only when they benefit personally

• Self-interest leads each individual to pursue actions that promotes the general welfare (Adam Smith)

Self Interest - Implications

– People spending other people’s money have no incentive to economize

– When self interest is furthered by information, people demand information

– Good health is not always considered the primary self interest goal (e.g. sky diving, obesity)

5.5. Markets and Pricing

• The market is the most efficient mechanism to allocate resources

• Everything and Everyone has a price• Pricing brings consumer demands and a

firm’s outputs into equilibrium• Implications

– The price of goods must be apparent to the consumer

– It is difficult to pay for social goods (e.g. medical education) in a price sensitive environment

6.6. Supply and Demand

• Pricing and and a firm’s output are based on supply and demand

• Implications– The amount of medical care demanded by an

individual decreases as the cost to the individual increases

– Information is critical to making demand decisions– When prices are held below equilibrium shortages

develop (e.g. workforce salaries – see primary care)

– Government administered pricing systems can never find the equilibrium point

7.7. Competition

• Competition forces owners to use their resources wisely to satisfy consumers

• Good competitors who optimize their resources are rewarded

• Competition promotes continuous improvement in the methods of production

• Implications– Well functioning markets require competition– Consolidation can result in monopoly/oligopoly and

shadow pricing– Inefficiency is reduced due to competition

8.8. Efficiency

• Efficient use of scarce resources promotes the social welfare

• Implications– Specialization leads to cost savings– Not all organizational structures promote

efficiency (e.g. small clinic vs. integrated system)

– Firms will not be efficient unless payment systems reward efficiency

9.9. Market Failure• Free markets sometimes fail to promote the

efficient use of resources• Sources include: monopolies, external forces,

public goods (e.g. education), incomplete information, and immobile resources (e.g hospital buildings)

• Implications– Policy making needs to accommodate market failure– Market power can insulate firms from competition– Public policy needs to accommodate: indigent care,

medical education, population health

10.10. Comparative Advantage

• Markets promote economic efficiency by all competitors

• Consumers buy the best product on the margin • Producers specialize in what they do best• Implications:

– Economic discipline can substitute for governmental intervention

– Consumers must have the funds to spend to have the markets functioning properly (e.g. universal insurance coverage)

Which principle can have the biggest impact on cost growth?

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33%

33%

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0% 1. Scarcity and choice

2. Opportunity cost

3. Self Interest

4. Markets and Pricing

5. Supply and Demand

6. Competition

7. Efficiency

8. Correcting Market Failure

9. Comparative Advantage

Government vs. Free Market

Government Control Free Market

Market Failure Corrections

Government vs. Free Market

Government Control

EuropeMoldova

Free Market

Market Failure Corrections

USA Alternative MedicineUSA Medical

Care

The Strange Case of IGT/UPL

• Environment in the USA– 40 million uninsured– Safety net system: Public Hospitals, community

clinics, some charity care throughout

• Medicaid– Designed for the low income – chronically ill– State share – approximately 50%– Source of state share could be local government

funds

The Strange Case of IGT/UPL - 2

• Medicaid payments below cost

• Demand rising at Safety net due to competition

• Intergovernmental transfer (IGT)– Public hospitals give funds to state– State matches with Federal funds– Medicaid pays higher rates

The Strange Case of IGT/UPL - 3

• To control this Feds say the state cannot pay more than Medicare would pay – Upper Payment limit

Economic principles violated

• The use of “other people’s money”• Pricing of Medicaid payments below cost• Paying for social goods in a price

competitive environment• Payment system does not reward efficiency

Payment Reform in the United States

Fee for Service• Clinics

– CPT codes (AMA) - procedure

– ICD-9 Diseases

– RVUs – relative value

– Regional practice cost adjustments

• Hospitals

– Per day

– Per Discharge

• DRGs

– Costs (outliers and others)

– Discounts by payers

Some Sample DRGs271 09 MED SKIN ULCERS272 09 MED MAJOR SKIN DISORDERS W CC273 09 MED MAJOR SKIN DISORDERS W/O CC274 09 MED MALIGNANT BREAST DISORDERS W CC275 09 MED MALIGNANT BREAST DISORDERS W/O CC276 09 MED NON-MALIGANT BREAST DISORDERS277 09 MED CELLULITIS AGE >17 W CC278 09 MED CELLULITIS AGE >17 W/O CC279 09 MED CELLULITIS AGE 0-17280 09 MED TRAUMA TO THE SKIN, SUBCUT TISS & BREAST AGE >17 W CC

281 09 MED TRAUMA TO THE SKIN, SUBCUT TISS & BREAST AGE >17 W/O CC282 09 MED TRAUMA TO THE SKIN, SUBCUT TISS & BREAST AGE 0-17

283 09 MED MINOR SKIN DISORDERS W CC284 09 MED MINOR SKIN DISORDERS W/O CC285 10 SURG AMPUTAT OF LOWER LIMB FOR ENDOCRINE,NUTRIT, METABOL

285 Disorders286 10 SURG ADRENAL & PITUITARY PROCEDURES287 10 SURG SKIN GRAFTS & WOUND DEBRID F

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Mayo’s proposal for Creating Value

Improve outcomes and satisfaction with U.S. health care. Decrease medical errors and waste.

– Develop a common definition of value

Value =Value =Cost over a span of careCost over a span of care

QualityQuality

(Outcomes, safety, service)

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Pay for Performance – Key Issues

• Goal: Improved health outcomes and lowered costs through use of EBM• Where doe the P4P$ come from?

– another form of withhold– savings on avoided inpatient care

• Reward top performance or improvement• Risk Adjustment• Administrative and other system improvement costs (EHR changes)• Focus on compliant patients only• Discourages care of complex patients

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Pay for Performance – Examples

• Bridges to Excellence– Diabetes– Cardiac care

• Integrated Healthcare Association – California• CMS Premier Hospital demonstration Project

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Tiering

• Buyer or health plan analyses providers and assigns them to a “tier”

• Tiering is based on cost and/or quality• Each tier has a differential price to the patient

– Monthly premium cost– Deductible and co-pays

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Tiering Example Minnesota Advantage

Tier Individual Family

1 $30 $60

2 $100 $200

3 $280 $560

4 $500 $1,000

Minnesota Advantage Health Plan Annual First-Dollar Deductible, 2006

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Tiering Example Minnesota Advantage

Number of Primary Care Clinics in Each Payment Tier for Minnesota Advantage, 2004 and 2006

0

100

200

300

400

500

600

Tier 1 Tier 2 Tier 3 Tier 4

2004

0

200

400

600

800

1000

1200

Tier 1 Tier 2 Tier 3 Tier 4

2006

Bundled Payments• All Payment Systems

– Ambulatory Care Groups– Chronic Disability Payment System– Episodes of Treatment Groups – ETGs– Prometheus

• Minnesota Baskets of Care– Peer Grouping for payment– Comprehensive payments (may exclude ER and hospitalizations

• Asthma (children) - Management of asthma as a chronic disease • Diabetes- Without co-morbidities, does include hypertension and hyperlipidemia • Low Back Pain - Management of acute episode of low back pain • Obstetric Care - Consider prenatal, uncomplicated vaginal delivery, cesarean

section delivery • Preventive Care (adults) • Preventive Care (children) - Well child care, preventive care, normal newborn

care • Total Knee Replacement - Inclusive

Managing Bundled payments

• Accountable group must contract with payer (ACO)• ACO must manage defined sets of costs

– Costs must be under direct or contractual control

• Care delivered by teams (Medical Home)• Registries and HIT critical• Risk adjustment needs to be included• Bundled payments are mid ground between full

capitation and fee for service

Mean Time Spent with Physician (in Minutes), 1989-2006

15.916.7 17.0 17.6

18.4 18.6 19.3 19.2 18.8 18.319.3 18.9 18.6 18.4

19.718.7

19.7

21.8

0

5

10

15

20

25

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Min

utes

Note: Includes ambulatory care visits made to nonfederally employed physicians’ offices in the United States (excluding physicians in the specialties of anesthesiology, radiology, and pathology). Visits to private, nonhospital-based clinics and HMOs are included if they are not federally operated facilities or hospital-based outpatient departments. Only visits where face-to-face contact with the physician occurred are included. Time spent with the physician excludes time spent waiting to see the physician, receiving care from someone other than the physician without the presence of the physician, or time spent by the physician in reviewing patient records and/or test results.

Source: Center for Disease Control and Prevention, National Center for Health Statistics, Division of Health Care Statistics: 2006 data at National Health Statistics Reports, No. 3, August. 6, 2008, National Ambulatory Medical Care Survey: 2006 Summary, Table 28, p.36, at http://www.cdc.gov/nchs/data/nhsr/nhsr003.pdf.

Thank You

Dan McLaughlindbmclaughlin@stthomas.edu

651-962-4143