Health Care Economics and Financing 2009

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

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

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 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

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. 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. 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. 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. 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. 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

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. 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?
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

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 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

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

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

Pay for Performance – Examples
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

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

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 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

Health Care Economics and Financing 2009

by Center for Health & Medical Affairs, University of St. Thomas on Oct 22, 2009

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Health Care Economics and Financing 2009 — Presentation Transcript