Hospitals Components of the Care Care Premium Payment

HospitalsHospitals

Components of the Care Care Components of the Care Care Premium PaymentPremium Payment

HIAA Issue Brief: “Why Do Health Insurance Premiums Rise?” Sept 2002

Physicians and Physicians and Other Health Other Health

ProvidersProviders

41%41%HospitalsHospitals

30%30%

Drugs and Drugs and Medical SuppliesMedical Supplies

14%14%

Nursing and Nursing and Home Health Home Health

CareCare

3%3%

Claims and Claims and Consumer Consumer ServicesServices

12%12%

Estimated Medicare Benefit Payments, by Estimated Medicare Benefit Payments, by Type of Service, 2002Type of Service, 2002

Hospital Inpatient,

40%

Skilled nursing

facilitites, 6%

Hospice, 2%

M+Choice, 13%

Home Health, 5%

Physicians, 17%

Hospital Outpt, 9%

Other part B benefits, 8%

Source: CBO, March 2002 Baseline: Medicare.

Total = $247 Billion

1980 2001

National Expenditures for Health Servicesand Supplies(1) by Category

1980 and 2001

Source: Centers for Medicare & Medicaid Services, Office of the Actuary

(1) Excludes medical research and medical facilities construction(2) “Other” includes net cost of insurance and administration, government public health activities, and other personal health care(3) “Other professional” includes dental and other non-physician professional services

Prescription Drugs - 5.2%

Trends in the Overall Health Care Market

Physician Services - 20.2%

Hospital Care - 43.5%

Nursing Home Care - 7.6%

Other(2) - 9.5%

Other Medical Durablesand Non-durables - 5.9%

Home Health Care - 1.0%

Other Professional(3) - 7.3%

$233.5 B $1372.6 B

Other Medical Durables andNon-durables – 3.7%

Prescription Drugs – 10.2%

Home Health Care - 2.4%

Other Professional(3) - 7.9%

Physician Services - 22.9%

Hospital Care - 32.9%

Other(2) - 12.9%

Nursing Home Care - 7.2%

10

Percent Change in National Expenditures forSelected Health Services and Supplies

1992 - 2001

-5%

0%

5%

10%

15%

20%

25%

92 93 94 95 96 97 98 99 00 01

Rx Drugs

Premiums

Hospital

Nursing home Home health

Source: The Lewin Group analysis of American Hospital Association Annual Survey data, 1980 – 2001, for community hospitals

Evolution of HospitalsEvolution of Hospitals

• Institutions of social welfareInstitutions of social welfare

• Built specifically to care for the sickBuilt specifically to care for the sick

• Institutions of medical practiceInstitutions of medical practice– growthgrowth

• Institutions of medical trainingInstitutions of medical training

• Institutions of health service consolidationInstitutions of health service consolidation

Types of HospitalsTypes of Hospitals

• Community / General Medical (Surgical)Community / General Medical (Surgical)– Acute CareAcute Care

• Specialty HospitalSpecialty Hospital

• Mental Illness / PsychiatricMental Illness / Psychiatric

• RehabilitationRehabilitation– Chronic diseaseChronic disease


Community HospitalCommunity Hospital

• Nonfederal, short stayNonfederal, short stay– < 30 days, acute< 30 days, acute

• Services available to the general publicServices available to the general public

– Examples of non-community hospitals?Examples of non-community hospitals?


Specialty HospitalSpecialty Hospital• Admits only certain types of patientsAdmits only certain types of patients

– WomenWomen– ChildrenChildren– Cardiac careCardiac care– RehabilitationRehabilitation– TuberculosisTuberculosis– EtcEtc

Hospitals can be distinguished by:Hospitals can be distinguished by:

OwnershipOwnership• Public (government owned)Public (government owned)

– FederalFederal• Military, VAMilitary, VA

– StateState• Mental, TBMental, TB

– LocalLocal• Community hospitalsCommunity hospitals• Serve urban areas, indigentServe urban areas, indigent• May be teaching hospitalMay be teaching hospital


OwnershipOwnership• Private Private

– VoluntaryVoluntary• Non-profit (tax-exempt)Non-profit (tax-exempt)

– Make profit, but cannot be distributed to individualsMake profit, but cannot be distributed to individuals

• Assets belong to communityAssets belong to community• Among all private hospitals, ~80% are nonprofitsAmong all private hospitals, ~80% are nonprofits

– Proprietary (investor-owned)Proprietary (investor-owned)• Owned by individuals, partners, or corporationsOwned by individuals, partners, or corporations• Operated for the financial benefit of stockholdersOperated for the financial benefit of stockholders

Major Distinguishing Features of Major Distinguishing Features of Non-profit HospitalsNon-profit Hospitals

• Exist primarily for some public goodExist primarily for some public good

• Profits are not distributed to any Profits are not distributed to any individualsindividuals– No shareholdersNo shareholders

• Exempt from income tax, sales tax, and Exempt from income tax, sales tax, and property taxproperty tax

They deliver benefits that exceed the subsidy?They deliver benefits that exceed the subsidy?


AffiliationAffiliation

• IndependentIndependent

• Multi-unit chains (hospital systems)Multi-unit chains (hospital systems)– AdvantagesAdvantages

• Reduced administrative overheadReduced administrative overhead• Provide broad scope of servicesProvide broad scope of services• Reach variety of marketsReach variety of markets• Access to capitalAccess to capital• Access to management resources, expertiseAccess to management resources, expertise

Hospitals in RIHospitals in RILifespan• Rhode Island Hospital• Bradley Hospital• Hasbro Children’s Hospital• The Miriam Hospital• Newport Hospital

Care New England• Women & Infants • Butler Hospital• Kent County Hospital

Unaffiliated• Roger Williams Medical Center• South County Hospital• Westerly Hospital

Partners Healthcare System• Memorial Hospital of RI

Department of Mental HealthRetardation and Hospitals• Eleanor Slater Hospital

St. Joseph Health Services• Our Lady of Fatima Hospital• St. Joseph Hospital for

Specialty Care

Landmark• Landmark Medical Center• Rehabilitation Hospital of

Rhode Island


• Teaching or Non-TeachingTeaching or Non-Teaching– AMA approved residency programs for MDsAMA approved residency programs for MDs– Affiliation with medical school or other health Affiliation with medical school or other health

disciplinediscipline– 24 hr Access to MD care24 hr Access to MD care– TechnologyTechnology– Residents, internsResidents, interns– Major or minorMajor or minor

• Member of Council of Teaching HospitalsMember of Council of Teaching Hospitals

• Osteopathic hospitalsOsteopathic hospitals

Hospital GovernanceHospital Governance

• Board of Trustees (governing body)Board of Trustees (governing body)• Define the missionDefine the mission• Set long-term directionSet long-term direction• Relationship with communityRelationship with community• Operational policiesOperational policies• Appoint and evaluate the CEOAppoint and evaluate the CEO• Approve MD appointmentApprove MD appointment

• Chief Operating Officer (CEO) Chief Operating Officer (CEO) • Responsible for day-to-day activitiesResponsible for day-to-day activities

• Medical Director (chief of staff)Medical Director (chief of staff)• Clinical oversightClinical oversight• Medical staffMedical staff

– Chiefs of serviceChiefs of service

• Medical staff CommitteesMedical staff Committees

Licensure, Certification, AccreditationLicensure, Certification, Accreditation

• Licensure Licensure (State function; Mandatory)(State function; Mandatory)

ConditionCondition::• Compliance with state laws, building codes, fire safety, Compliance with state laws, building codes, fire safety,

sanitation standardssanitation standards

• Certification Certification (Federal function; non-mandatory per se)(Federal function; non-mandatory per se)

ConditionCondition::• Satisfy conditions of participationSatisfy conditions of participation• Compliance with standardsCompliance with standards

• AccreditationAccreditation (Private function, voluntary)(Private function, voluntary)

ConditionCondition::• Joint Commission for Accreditation of Healthcare Joint Commission for Accreditation of Healthcare

Organizations (JCAHO)Organizations (JCAHO)

RegulationRegulation• StateState

– License from Department of Public HealthLicense from Department of Public Health– May restrict to Not-For ProfitMay restrict to Not-For Profit– Mix of ServicesMix of Services

• Medicine, pathology, radiology, pharmacy, ED, etc.Medicine, pathology, radiology, pharmacy, ED, etc.

– Minimum StandardsMinimum Standards• Physical plantPhysical plant• StaffingStaffing• Infectious disease controlsInfectious disease controls• Quality assuranceQuality assurance

Key Law:Key Law:A. The Hill-Burton Free Care ProgramA. The Hill-Burton Free Care Program

• 1946 - Modernize after Depression, WWII1946 - Modernize after Depression, WWII– In return for funds, hospitals must provide In return for funds, hospitals must provide

free care (not bad debt)free care (not bad debt)

• 1975 Title XVI Public Health Service Act1975 Title XVI Public Health Service Act– must provide uncompensated services in perpetuitymust provide uncompensated services in perpetuity– Govt. can recover funds after institution soldGovt. can recover funds after institution sold

B. Emergency Medical Treatment and Active Labor Act B. Emergency Medical Treatment and Active Labor Act (EMTALA)(EMTALA)

• 1986 - Forbids Medicare participating 1986 - Forbids Medicare participating hospitals from dumping patients out of EDshospitals from dumping patients out of EDs– patients may be transferred after screened and patients may be transferred after screened and

stabilized only if at no riskstabilized only if at no risk– must attempt to communicate with non-English must attempt to communicate with non-English

speaking patientsspeaking patients• Non-compliance = $50,000 penalty/pt + lawsuitNon-compliance = $50,000 penalty/pt + lawsuit• Most states have legislation requiring some Most states have legislation requiring some

degree of ED caredegree of ED care

C. Sherman Antitrust ActC. Sherman Antitrust Act

• Section I. Every contract… in restraint of Section I. Every contract… in restraint of trade or commerce among the several trade or commerce among the several states…is declared to be illegal states…is declared to be illegal – If ‘market power’ possessedIf ‘market power’ possessed

• Section II. Every person who shall Section II. Every person who shall monopolize or ATTEMPTS to monopolize monopolize or ATTEMPTS to monopolize …any part of trade or commerce shall be …any part of trade or commerce shall be deemed guilty of a felonydeemed guilty of a felony

D. Patient RightsD. Patient Rights

• Informed ConsentInformed Consent

• Advance DirectivesAdvance Directives– Do not resuscitate ordersDo not resuscitate orders– Living willLiving will– Durable owner of attorneyDurable owner of attorney

• Hill-Burton noticeHill-Burton notice

• Is the hospital industry growing or Is the hospital industry growing or retrenching?retrenching?

Number of Beds and Number of Beds per 1,000 Persons 1980 - 2001

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 010.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0


Hospital ExpansionHospital Expansion1960-19801960-1980

Factors:Factors:

• Advances in medical science/serviceAdvances in medical science/service

• Development of specialized technologyDevelopment of specialized technology

• Advances in medical educationAdvances in medical education

• Development of professional nursingDevelopment of professional nursing

• Growth of health insuranceGrowth of health insurance

• Role of governmentRole of government

Hospital ExpansionHospital Expansion

Role of government:Role of government:• Hill-Burton Act (1946) provided federal Hill-Burton Act (1946) provided federal

construction and repair grants to statesconstruction and repair grants to states• Medicare and MedicaidMedicare and Medicaid

– Cost-plus reimbursementCost-plus reimbursement

• Between 1965-1980 hospital beds increased by Between 1965-1980 hospital beds increased by ~33%~33%

Hospital DownsizingHospital Downsizing1980s 1980s

Factors:Factors:• ReimbursementReimbursement

– DRG (1983)DRG (1983)

• Economic constraintsEconomic constraints– Small rural Small rural

• TechnologyTechnology– Move to outpatient servicesMove to outpatient services

• Utilization controlsUtilization controls• Social factorsSocial factors

Shift to Outpatient ServicesShift to Outpatient Services

• Technology Technology – reduces inpatient daysreduces inpatient days– reduces need for inpatient servicesreduces need for inpatient services

• Homecare, outpatient services, and Homecare, outpatient services, and neighborhood clinics neighborhood clinics

• Influence of prospective paymentInfluence of prospective payment– MCO’s and Govt. reduced length of stayMCO’s and Govt. reduced length of stay

Total Hospital Outpatient Visitsin Community Hospitals 1980 - 2001

0

100

200

300

400

500

600

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01

Mill

ion

s


Number of Freestanding Ambulatory CareSurgery Centers1996, 1998, 2000, and 2002

2,425

2,754 2,864

3,570

0

500

1000

1500

2000

2500

3000

3500

4000

1996 1998 2000 2002

Source: SMG Marketing Group

Percentage Share of Inpatient vs. Outpatient Surgeries 1980 - 2001

0%

20%

40%

60%

80%

100%

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01

InpatientSurgeries

OutpatientSurgeries


IntegrationIntegration

• VerticalVertical• expand rage of servicesexpand rage of services

• HorizontalHorizontal• mergers and affiliationsmergers and affiliations

Current Economic PressuresCurrent Economic Pressures

• Increasing demandIncreasing demand• Rising input costsRising input costs

– LaborLabor– DrugsDrugs– Medical devicesMedical devices

• Medical liability insurance crisisMedical liability insurance crisis• New requirements for disaster readiness New requirements for disaster readiness

and HIPAAand HIPAA• RecessionRecession

Inpatient Admissions in Community Hospitals 1980 - 2001

27

28

29

30

31

32

33

34

35

36

37

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01

Source: The Lewin Group analysis of American Hospital Association Annual Survey data, 1980 – 2001, for community hospitals.

Mill

ions

Total Inpatient Days in Community Hospitals 1980 - 2001

100

120

140

160

180

200

220

240

260

280

300

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01

Mill

ions


Average Length of Stay in Community Hospitals 1980 - 2001

7.6

7.6

7.6

7.6

7.3

7.1

7.1

7.2

7.2

7.2

7.2

7.2

7.1

7.0

6.7

6.5

6.2

6.1

6.0

5.9

5.8

5.7

0

1

2

3

4

5

6

7

8

9

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01


DA

YS

Share of Growth in Spending on Hospital Care 1997 to 2001 (~84B)

Costs of goods and services44.6%

Volume of

Services55.4%

Source: PricewaterhouseCoopers calculations, February 2003.

Population Growth 21%

Utilization Rate

34.4%

Share of Growth in Spending on Hospital Care 1997 to 2001 (~84B)

Volume of Services55.4%

Costs of goods

and services

44.6%

Wages 32%

Benefits 7%

Drugs 3.5%

Supplies and Services 21%

Other: -18.3% efficiencies

Aggregate Hospital Payment-to-Cost Ratiosfor Private Payers, Medicare and Medicaid

1980 - 2001

70%

80%

90%

100%

110%

120%

130%

140%

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01


(1) Includes Medicaid Disproportionate Share payments

Private Payer

Medicare

Medicaid(1)

Local Economic InfluenceLocal Economic Influence

• Hospital as PurchaserHospital as Purchaser

• Hospital as EmployerHospital as Employer

• Provider of Discounted and Provider of Discounted and Uncompensated CareUncompensated Care

• Provides Health Education and Promotion Provides Health Education and Promotion ProgramsPrograms

For-Profit versus Not-for-ProfitFor-Profit versus Not-for-Profit

• ...As you can see, Dr. Rawlings and the Terrace Heights Hospital are not prejudiced. Anyone can get in, regardless of race, color, or creed - they just have to be able to pay! Their admission does not depend upon the degree of the their illness, but on the right insurance card.

• That's a far cry from the sign in front of Albert Schwitzer's Jungle Hospital, which reads, 'Here, at whatever hour you come, you will find light and help and human kindness.' What a rotten business man Schweitzer must have been, but what a magnificent doctor and humanitarian he was. When the only consideration of the hospital is concern for the profit margin, humanity goes out the window. And without humanity, you cannot have good medicine. "

“There's nothing wrong with running a health-care enterprise for profit. After all, doctors, nurses and drug companies work for profit.” Uwe Reinhardt, professor of health economics - Princeton

``If we don't have a sound bottom line, we can't keep the quality there, we can't provide the technology, we can't pay the best people.'’ Columbia HCA's chief executive officer, Thomas Frist Jr

``There's never been a study showing that for-profit hospitals do any better or worse job taking care of patients than nonprofits,'’ Judy Feder, health care researcher Georgetown University.

``It has no place in the health care system. For-profit hospitals will self destruct because they'll get too greedy. Rep. Pete Stark (D., Calif.).

For-Profit vs Not-for-ProfitFor-Profit vs Not-for-Profit

• Administrative costs: Higher Administrative costs: Higher administrative costs as a percentage of administrative costs as a percentage of all costs at for-profit hospitalsall costs at for-profit hospitals– Woolhandler and Himmelstein (NEJM, 3/13/97) Woolhandler and Himmelstein (NEJM, 3/13/97)

• Technology: Possible incentive for Technology: Possible incentive for teaching public hospitals to invest in teaching public hospitals to invest in newer technologies (= quality?)newer technologies (= quality?)

For-Profit HospitalsFor-Profit Hospitals

• For-Profit hospitals 3-11% more expensive For-Profit hospitals 3-11% more expensive than NFPsthan NFPs– Shorten staysShorten stays– Up-coding of DRGsUp-coding of DRGs

• For-Profit spend less on personnelFor-Profit spend less on personnel• Avoid charity care?Avoid charity care?

• Seek areas where little competitionSeek areas where little competition

For-Profit HospitalsFor-Profit Hospitals

• Spend more on ancillary services and Spend more on ancillary services and administrationadministration– Highly paid executivesHighly paid executives

– Ensure profitabilityEnsure profitability

• Investors expect returns of 10- 15% or moreInvestors expect returns of 10- 15% or more

• FPs must pay taxes on their profitsFPs must pay taxes on their profits

Concerns about For-Profit HospitalsConcerns about For-Profit Hospitals

• Loss of local control of a valued community resource and employer, often one of the biggest in town

• Allegations that they buy troubled nonprofit hospitals at bargain prices and don't adequately reimburse states and cities for years of the hospitals’ tax-free status

• Concern that hospital chains are building local health care empires that wield too much clout against competitors.

• Unease about the quality and amount of free care to poor and uninsured patients.

• Change in ownership quick and clandestineChange in ownership quick and clandestine

• Extent to which charitable assets are repaid Extent to which charitable assets are repaid

• Golden parachute for former hospital CEOGolden parachute for former hospital CEO

• Reduction in unprofitable segmentsReduction in unprofitable segments

• IntangiblesIntangibles– transportation, teen pregnancy prevention transportation, teen pregnancy prevention

program, school health clinicprogram, school health clinic

Concerns about For-Profit Hospitals Concerns about For-Profit Hospitals (cont.)(cont.)

LARGEST FOR-PROFIT, PUBLICLY TRADED LARGEST FOR-PROFIT, PUBLICLY TRADED HOSPITAL COMPANIESHOSPITAL COMPANIES

(ranked by number of licensed beds)(ranked by number of licensed beds)

1. 1. HCA INC. (based in Nashville)HCA INC. (based in Nashville)175 hospitals175 hospitals40,056 licensed beds40,056 licensed beds

2. 2. TENET HEALTHCARE CORPTENET HEALTHCARE CORP. . (Santa Barbara, CA)(Santa Barbara, CA)113 hospitals113 hospitals27,748 licensed beds27,748 licensed beds

3. TRIAD HOSPITALS INC. 3. TRIAD HOSPITALS INC. (Dallas)(Dallas)45 hospitals45 hospitals7,816 licensed beds7,816 licensed beds

4. COMMUNITY HEALTH 4. COMMUNITY HEALTH SYSTEMS INC. (Brentwood, SYSTEMS INC. (Brentwood, TN)TN)70 hospitals70 hospitals7,020 licensed beds7,020 licensed beds

5. UNIVERSAL HEALTH SERVICES 5. UNIVERSAL HEALTH SERVICES INC. (King of Prussia, PA)INC. (King of Prussia, PA)25 hospitals25 hospitals5,846 licensed beds5,846 licensed beds

6. HEALTH MANAGEMENT 6. HEALTH MANAGEMENT ASSOCIATES INC. (Naples, FL)ASSOCIATES INC. (Naples, FL)41 hospitals41 hospitals5, 769 licensed beds5, 769 licensed beds

7. PROVINCE HEALTHCARE 7. PROVINCE HEALTHCARE COMPANY (Brentwood, TN)COMPANY (Brentwood, TN)20 hospitals20 hospitals2,315 licensed beds2,315 licensed beds

8. LIFEPOINT HOSPITALS INC. 8. LIFEPOINT HOSPITALS INC. (Brentwood, TN)(Brentwood, TN)23 hospitals23 hospitals2,196 licensed beds2,196 licensed beds

http://www.corp-research.org/jan03.htm

The short term outlookThe short term outlook• Inpatient Inpatient Outpatient Outpatient• IntegrationIntegration

– Vertical (expand rage of services)Vertical (expand rage of services)– Horizontal (mergers and affiliations)Horizontal (mergers and affiliations)

• Payment: Power balancePayment: Power balance• RegulationRegulation• SafetySafety• Labor shortagesLabor shortages• Information technology / HIPAAInformation technology / HIPAA• ConsumerismConsumerism

Hospitals Components of the Care Care Premium Payment

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