Health Care Economics and Financing 2009 Daniel B. McLaughlin

The legislative process - Update House 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

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? Before October 31 November 1 – 15 Before Thanksgiving Between Thanksgiving and December 16 Before Christmas Next year Never

Before October 31

November 1 – 15

Before Thanksgiving

Between Thanksgiving and December 16

Before Christmas

Next year

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

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

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 Individual Health Medical Care

Employers Remain Primary Sponsor of Coverage Distribution of 307 Million People by Primary Source of Coverage Employer Direct 164m 53% Uninsured 49m 16% Medicare 39m 13% Medicaid 42m 14% Medicare 41m 13% Individual Direct 14m 5% Employer Direct 55m 18% 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).

Relative Contributions of Different Types of Health Services to Total Growth in National Health Expenditures, 1997-2007 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. 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

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. 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

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. 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)

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. 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)

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)

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. 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

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. 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

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. 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

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. 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

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. 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

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. 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)

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? Scarcity and choice Opportunity cost Self Interest Markets and Pricing Supply and Demand Competition Efficiency Correcting Market Failure Comparative Advantage

Scarcity and choice

Opportunity cost

Self Interest

Markets and Pricing

Supply and Demand

Competition

Efficiency

Correcting Market Failure

Comparative Advantage

Government vs. Free Market Government Control Free Market Market Failure Corrections

Government vs. Free Market Government Control Europe Moldova Free Market Market Failure Corrections USA Alternative Medicine USA 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

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

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

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

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

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 DRGs 271 09 MED SKIN ULCERS 272 09 MED MAJOR SKIN DISORDERS W CC 273 09 MED MAJOR SKIN DISORDERS W/O CC 274 09 MED MALIGNANT BREAST DISORDERS W CC 275 09 MED MALIGNANT BREAST DISORDERS W/O CC 276 09 MED NON-MALIGANT BREAST DISORDERS 277 09 MED CELLULITIS AGE >17 W CC 278 09 MED CELLULITIS AGE >17 W/O CC 279 09 MED CELLULITIS AGE 0-17 280 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 CC 282 09 MED TRAUMA TO THE SKIN, SUBCUT TISS & BREAST AGE 0-17 283 09 MED MINOR SKIN DISORDERS W CC 284 09 MED MINOR SKIN DISORDERS W/O CC 10 SURG AMPUTAT OF LOWER LIMB FOR ENDOCRINE,NUTRIT, METABOL Disorders 286 10 SURG ADRENAL & PITUITARY PROCEDURES 287 10 SURG SKIN GRAFTS & WOUND DEBRID F

271 09 MED SKIN ULCERS

272 09 MED MAJOR SKIN DISORDERS W CC

273 09 MED MAJOR SKIN DISORDERS W/O CC

274 09 MED MALIGNANT BREAST DISORDERS W CC

275 09 MED MALIGNANT BREAST DISORDERS W/O CC

276 09 MED NON-MALIGANT BREAST DISORDERS

277 09 MED CELLULITIS AGE >17 W CC

278 09 MED CELLULITIS AGE >17 W/O CC

279 09 MED CELLULITIS AGE 0-17

280 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 CC

282 09 MED TRAUMA TO THE SKIN, SUBCUT TISS & BREAST AGE 0-17

283 09 MED MINOR SKIN DISORDERS W CC

284 09 MED MINOR SKIN DISORDERS W/O CC

10 SURG AMPUTAT OF LOWER LIMB FOR ENDOCRINE,NUTRIT, METABOL

Disorders

286 10 SURG ADRENAL & PITUITARY PROCEDURES

287 10 SURG SKIN GRAFTS & WOUND DEBRID F

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 (Outcomes, safety, service) Value = Cost over a span of care Quality

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

Develop a common definition of value

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

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

Pay for Performance – Examples Bridges to Excellence Diabetes Cardiac care Integrated Healthcare Association – California CMS Premier Hospital demonstration Project

Bridges to Excellence

Diabetes

Cardiac care

Integrated Healthcare Association – California

CMS Premier Hospital demonstration Project

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

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

Tiering Example Minnesota Advantage Minnesota Advantage Health Plan Annual First-Dollar Deductible, 2006 Tier Individual Family 1 $30 $60 2 $100 $200 3 $280 $560 4 $500 $1,000

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

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

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 Minutes 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 McLaughlin [email_address] 651-962-4143