Health Care Economics and Financing 2009

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  • CPxxxxxxx Smoldt, R QAU MB 11-22-2005
  • Perhaps contrary to popular belief, physician visits have gotten longer, not shorter, in the past 15 years -- on average almost 6 minutes longer in 2006 than in 1989 (21.8 minutes vs. 15.9 minutes). The 2006 mean time spent with physicians varies by specialty: 16.8 minutes for pediatrics, 19.5 minutes for general and family practice, 21.5 minutes for internal medicine, and 32.6 minutes for psychiatry.
  • Health Care Economics and Financing 2009

    1. 1. Health Care Economics and Financing 2009 Daniel B. McLaughlin
    2. 2. 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
    3. 3. Current Issues <ul><li>Individual and employer mandate </li></ul><ul><li>Subsidy levels </li></ul><ul><li>Funding </li></ul><ul><ul><li>From Medicare to Private subsidies in exchange </li></ul></ul><ul><ul><li>Tax on “Cadillac” health plans </li></ul></ul><ul><ul><li>Medicare Advantage – reduced benefits </li></ul></ul><ul><li>Public Options – Co-ops in the exchange </li></ul>
    4. 4. When will reform be signed into law? <ul><li>Before October 31 </li></ul><ul><li>November 1 – 15 </li></ul><ul><li>Before Thanksgiving </li></ul><ul><li>Between Thanksgiving and December 16 </li></ul><ul><li>Before Christmas </li></ul><ul><li>Next year </li></ul><ul><li>Never </li></ul>
    5. 5. Health Care Financing “ You know – in health care its not the money, it’s the money” – famous health care executive
    6. 6. Objectives <ul><li>Overview of health care financing principles in a free market economy </li></ul><ul><li>Use of these principles in policy development </li></ul><ul><li>Review 5 Important issues in Health financing policy </li></ul>
    7. 7. Policy Topics <ul><li>Payment reform </li></ul><ul><li>Managing consumer demand for health services </li></ul><ul><li>Health Insurance </li></ul><ul><li>Moving consumers to healthy lifestyles </li></ul><ul><li>Technology diffusion and cost management </li></ul>
    8. 8. General Financing Model Government Productivity Personal Assets Employers Taxes Insurance Individual Health Medical Care
    9. 9. 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).
    10. 10. 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).
    11. 11. 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).
    12. 12. 1. Scarcity and Choice <ul><li>Limited resources but unlimited wants </li></ul><ul><li>Must allocate resources among competing objectives </li></ul><ul><li>Implications </li></ul><ul><ul><li>Resources used for health can not be used elsewhere </li></ul></ul><ul><ul><li>Can not have everything we want – hence tradeoffs </li></ul></ul>
    13. 13. 2. Opportunity Cost <ul><li>Everything and everyone has alternatives </li></ul><ul><li>Time and resources can only be used once </li></ul><ul><li>Any action results in another action not taken – “Opportunity cost” </li></ul><ul><li>Implications </li></ul><ul><ul><li>Medical care involves costs as well as benefits </li></ul></ul><ul><ul><li>E.g. CT scan diminishes funds available for immunization </li></ul></ul>
    14. 14. 3. Marginal Analysis <ul><li>Decisions are made at the margin of cost/benefit </li></ul><ul><li>Incremental costs can provide incremental benefits </li></ul><ul><li>Implications </li></ul><ul><ul><li>When marginal costs are low services are treated as “free” – e.g first dollar coverage </li></ul></ul><ul><ul><li>Balancing of marginal benefit with marginal cost will result in optimal resource allocation (e.g correct generic vs. formulary drug for hypertension) </li></ul></ul>
    15. 15. 4. Self-Interest <ul><li>People pursue their own self interest </li></ul><ul><li>People respond to incentives only when they benefit personally </li></ul><ul><li>Self-interest leads each individual to pursue actions that promotes the general welfare (Adam Smith) </li></ul>
    16. 16. Self Interest - Implications <ul><ul><li>People spending other people’s money have no incentive to economize </li></ul></ul><ul><ul><li>When self interest is furthered by information, people demand information </li></ul></ul><ul><ul><li>Good health is not always considered the primary self interest goal (e.g. sky diving, obesity) </li></ul></ul>
    17. 17. 5. Markets and Pricing <ul><li>The market is the most efficient mechanism to allocate resources </li></ul><ul><li>Everything and Everyone has a price </li></ul><ul><li>Pricing brings consumer demands and a firm’s outputs into equilibrium </li></ul><ul><li>Implications </li></ul><ul><ul><li>The price of goods must be apparent to the consumer </li></ul></ul><ul><ul><li>It is difficult to pay for social goods (e.g. medical education) in a price sensitive environment </li></ul></ul>
    18. 18. 6. Supply and Demand <ul><li>Pricing and and a firm’s output are based on supply and demand </li></ul><ul><li>Implications </li></ul><ul><ul><li>The amount of medical care demanded by an individual decreases as the cost to the individual increases </li></ul></ul><ul><ul><li>Information is critical to making demand decisions </li></ul></ul><ul><ul><li>When prices are held below equilibrium shortages develop (e.g. workforce salaries – see primary care) </li></ul></ul><ul><ul><li>Government administered pricing systems can never find the equilibrium point </li></ul></ul>
    19. 19. 7. Competition <ul><li>Competition forces owners to use their resources wisely to satisfy consumers </li></ul><ul><li>Good competitors who optimize their resources are rewarded </li></ul><ul><li>Competition promotes continuous improvement in the methods of production </li></ul><ul><li>Implications </li></ul><ul><ul><li>Well functioning markets require competition </li></ul></ul><ul><ul><li>Consolidation can result in monopoly/oligopoly and shadow pricing </li></ul></ul><ul><ul><li>Inefficiency is reduced due to competition </li></ul></ul>
    20. 20. 8. Efficiency <ul><li>Efficient use of scarce resources promotes the social welfare </li></ul><ul><li>Implications </li></ul><ul><ul><li>Specialization leads to cost savings </li></ul></ul><ul><ul><li>Not all organizational structures promote efficiency (e.g. small clinic vs. integrated system) </li></ul></ul><ul><ul><li>Firms will not be efficient unless payment systems reward efficiency </li></ul></ul>
    21. 21. 9. Market Failure <ul><li>Free markets sometimes fail to promote the efficient use of resources </li></ul><ul><li>Sources include: monopolies, external forces, public goods (e.g. education), incomplete information, and immobile resources (e.g hospital buildings) </li></ul><ul><li>Implications </li></ul><ul><ul><li>Policy making needs to accommodate market failure </li></ul></ul><ul><ul><li>Market power can insulate firms from competition </li></ul></ul><ul><ul><li>Public policy needs to accommodate: indigent care, medical education, population health </li></ul></ul>
    22. 22. 10. Comparative Advantage <ul><li>Markets promote economic efficiency by all competitors </li></ul><ul><li>Consumers buy the best product on the margin </li></ul><ul><li>Producers specialize in what they do best </li></ul><ul><li>Implications: </li></ul><ul><ul><li>Economic discipline can substitute for governmental intervention </li></ul></ul><ul><ul><li>Consumers must have the funds to spend to have the markets functioning properly (e.g. universal insurance coverage) </li></ul></ul>
    23. 23. Which principle can have the biggest impact on cost growth? <ul><li>Scarcity and choice </li></ul><ul><li>Opportunity cost </li></ul><ul><li>Self Interest </li></ul><ul><li>Markets and Pricing </li></ul><ul><li>Supply and Demand </li></ul><ul><li>Competition </li></ul><ul><li>Efficiency </li></ul><ul><li>Correcting Market Failure </li></ul><ul><li>Comparative Advantage </li></ul>
    24. 24. Government vs. Free Market Government Control Free Market Market Failure Corrections
    25. 25. Government vs. Free Market Government Control Europe Moldova Free Market Market Failure Corrections USA Alternative Medicine USA Medical Care
    26. 26. The Strange Case of IGT/UPL <ul><li>Environment in the USA </li></ul><ul><ul><li>40 million uninsured </li></ul></ul><ul><ul><li>Safety net system: Public Hospitals, community clinics, some charity care throughout </li></ul></ul><ul><li>Medicaid </li></ul><ul><ul><li>Designed for the low income – chronically ill </li></ul></ul><ul><ul><li>State share – approximately 50% </li></ul></ul><ul><ul><li>Source of state share could be local government funds </li></ul></ul>
    27. 27. The Strange Case of IGT/UPL - 2 <ul><li>Medicaid payments below cost </li></ul><ul><li>Demand rising at Safety net due to competition </li></ul><ul><li>Intergovernmental transfer (IGT) </li></ul><ul><ul><li>Public hospitals give funds to state </li></ul></ul><ul><ul><li>State matches with Federal funds </li></ul></ul><ul><ul><li>Medicaid pays higher rates </li></ul></ul>
    28. 28. The Strange Case of IGT/UPL - 3 <ul><li>To control this Feds say the state cannot pay more than Medicare would pay – Upper Payment limit </li></ul>
    29. 29. Economic principles violated <ul><li>The use of “other people’s money” </li></ul><ul><li>Pricing of Medicaid payments below cost </li></ul><ul><li>Paying for social goods in a price competitive environment </li></ul><ul><li>Payment system does not reward efficiency </li></ul>
    30. 30. Payment Reform in the United States
    31. 31. Fee for Service <ul><li>Clinics </li></ul><ul><ul><li>CPT codes (AMA) - procedure </li></ul></ul><ul><ul><li>ICD-9 Diseases </li></ul></ul><ul><ul><li>RVUs – relative value </li></ul></ul><ul><ul><li>Regional practice cost adjustments </li></ul></ul><ul><li>Hospitals </li></ul><ul><ul><li>Per day </li></ul></ul><ul><ul><li>Per Discharge </li></ul></ul><ul><ul><ul><li>DRGs </li></ul></ul></ul><ul><ul><li>Costs (outliers and others) </li></ul></ul><ul><ul><li>Discounts by payers </li></ul></ul>
    32. 32. Some Sample DRGs <ul><li>271 09 MED SKIN ULCERS </li></ul><ul><li>272 09 MED MAJOR SKIN DISORDERS W CC </li></ul><ul><li>273 09 MED MAJOR SKIN DISORDERS W/O CC </li></ul><ul><li>274 09 MED MALIGNANT BREAST DISORDERS W CC </li></ul><ul><li>275 09 MED MALIGNANT BREAST DISORDERS W/O CC </li></ul><ul><li>276 09 MED NON-MALIGANT BREAST DISORDERS </li></ul><ul><li>277 09 MED CELLULITIS AGE >17 W CC </li></ul><ul><li>278 09 MED CELLULITIS AGE >17 W/O CC </li></ul><ul><li>279 09 MED CELLULITIS AGE 0-17 </li></ul><ul><li>280 09 MED TRAUMA TO THE SKIN, SUBCUT TISS & BREAST AGE >17 W CC </li></ul><ul><li>281 09 MED TRAUMA TO THE SKIN, SUBCUT TISS & BREAST AGE >17 W/O CC </li></ul><ul><li>282 09 MED TRAUMA TO THE SKIN, SUBCUT TISS & BREAST AGE 0-17 </li></ul><ul><li>283 09 MED MINOR SKIN DISORDERS W CC </li></ul><ul><li>284 09 MED MINOR SKIN DISORDERS W/O CC </li></ul><ul><li>10 SURG AMPUTAT OF LOWER LIMB FOR ENDOCRINE,NUTRIT, METABOL </li></ul><ul><ul><ul><ul><ul><li>Disorders </li></ul></ul></ul></ul></ul><ul><li>286 10 SURG ADRENAL & PITUITARY PROCEDURES </li></ul><ul><li>287 10 SURG SKIN GRAFTS & WOUND DEBRID F </li></ul>
    33. 33. Mayo’s proposal for Creating Value <ul><li>Improve outcomes and satisfaction with U.S. health care. Decrease medical errors and waste. </li></ul><ul><ul><li>Develop a common definition of value </li></ul></ul>(Outcomes, safety, service) Value = Cost over a span of care Quality
    34. 34. Pay for Performance – Key Issues <ul><li>Goal: Improved health outcomes and lowered costs through use of EBM </li></ul><ul><li>Where doe the P4P$ come from? </li></ul><ul><ul><li>another form of withhold </li></ul></ul><ul><ul><li>savings on avoided inpatient care </li></ul></ul><ul><li>Reward top performance or improvement </li></ul><ul><li>Risk Adjustment </li></ul><ul><li>Administrative and other system improvement costs (EHR changes) </li></ul><ul><li>Focus on compliant patients only </li></ul><ul><li>Discourages care of complex patients </li></ul>
    35. 35. Pay for Performance – Examples <ul><li>Bridges to Excellence </li></ul><ul><ul><li>Diabetes </li></ul></ul><ul><ul><li>Cardiac care </li></ul></ul><ul><li>Integrated Healthcare Association – California </li></ul><ul><li>CMS Premier Hospital demonstration Project </li></ul>
    36. 36. Tiering <ul><li>Buyer or health plan analyses providers and assigns them to a “tier” </li></ul><ul><li>Tiering is based on cost and/or quality </li></ul><ul><li>Each tier has a differential price to the patient </li></ul><ul><ul><li>Monthly premium cost </li></ul></ul><ul><ul><li>Deductible and co-pays </li></ul></ul>
    37. 37. 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
    38. 38. Tiering Example Minnesota Advantage Number of Primary Care Clinics in Each Payment Tier for Minnesota Advantage, 2004 and 2006 2004 2006
    39. 39. Bundled Payments <ul><li>All Payment Systems </li></ul><ul><ul><li>Ambulatory Care Groups </li></ul></ul><ul><ul><li>Chronic Disability Payment System </li></ul></ul><ul><ul><li>Episodes of Treatment Groups – ETGs </li></ul></ul><ul><ul><li>Prometheus </li></ul></ul><ul><li>Minnesota Baskets of Care </li></ul><ul><ul><li>Peer Grouping for payment </li></ul></ul><ul><ul><li>Comprehensive payments (may exclude ER and hospitalizations </li></ul></ul><ul><ul><ul><li>Asthma (children) - Management of asthma as a chronic disease </li></ul></ul></ul><ul><ul><ul><li>Diabetes - Without co-morbidities, does include hypertension and hyperlipidemia </li></ul></ul></ul><ul><ul><ul><li>Low Back Pain - Management of acute episode of low back pain </li></ul></ul></ul><ul><ul><ul><li>Obstetric Care - Consider prenatal, uncomplicated vaginal delivery, cesarean section delivery </li></ul></ul></ul><ul><ul><ul><li>Preventive Care (adults) </li></ul></ul></ul><ul><ul><ul><li>Preventive Care (children) - Well child care, preventive care, normal newborn care </li></ul></ul></ul><ul><ul><ul><li>Total Knee Replacement - Inclusive </li></ul></ul></ul>
    40. 40. Managing Bundled payments <ul><li>Accountable group must contract with payer (ACO) </li></ul><ul><li>ACO must manage defined sets of costs </li></ul><ul><ul><li>Costs must be under direct or contractual control </li></ul></ul><ul><li>Care delivered by teams (Medical Home) </li></ul><ul><li>Registries and HIT critical </li></ul><ul><li>Risk adjustment needs to be included </li></ul><ul><li>Bundled payments are mid ground between full capitation and fee for service </li></ul>
    41. 41. 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 .
    42. 42. Thank You Dan McLaughlin [email_address] 651-962-4143

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