Chapter 07

Chapter 7
Paying for Health Care in America:
Rising Costs and Challenges
Copyright © 2014 by Mosby, an imprint of Elsevier Inc.

 Historical highlights
 1847: Massachusetts Health Insurance of Boston offers
group policy
 1861-1865: Insurance plans available during Civil War
 1929: First group health coverage for a monthly charge for
teachers in Dallas, Texas; beginning of Blue Cross/Blue
Shield
 1950s: Employee benefit packages initiated to attract
workers
 1965: Creation of Medicare and Medicaid programs,
making comprehensive health care available to millions of
Americans
History of Health Care Financing
Copyright © 2014 by Mosby, an imprint of Elsevier Inc. 2

 Historical highlights
 1980-1990: Managed care plans emerge
 1993: Hospitals come under DRGs
 2003: Medicare Prescription Drug Improvement and
Modernization Act of 2003; most significant expansion
of Medicare since its enactment
 2006: Pay-for-performance introduced
 2008: Medicare no longer pays hospitals for treating
preventable errors known as never events
 2010: Congress passes sweeping health care reform
legislation: Patient Protection and Affordable Care Act
(cont'd)

 Themes that have driven health care financing
 Physician was primarily responsible for decision
making
• Physicians controlled all access to health care services
• Tests or procedures were provided if physician determined
that any marginal benefit might be obtained
 Objective was to provide the best care to everyone
 Sophistication and cost of medical technology rapidly
increased
(cont'd)

 Fee-for-service payment method and economic
incentives contributed to increased costs
• The more tests or procedures performed, the greater the
physician’s earnings because earnings tied to procedures
• Economic incentives to provide as much care as possible
• Patients insulated from costs because insurance was paying
the bill
(cont'd)

 Lack of cost consciousness contributed to increased
costs
• Patients not aware of costs
• Providers had little incentive to be concerned about costs
• Providers received more income for using more services
• Providers incurred no financial risk for using additional
resources
(cont'd)

 Medicare expenditures increased rapidly
• The program was implemented in 1965 with a fee-for-service
payment mechanism
• Rapid growth of expenditures became a major factor in the
federal budget deficit
(cont'd)

 Health care financing revolution
 In 1965, health expenditures were $202/person; rose
to $8,402/person by 2010
 Initiated in 1983 when Medicare moved to a
prospective payment system based on DRGs
 Medicare limited total payment to the hospital to an
amount preestablished for the patient’s specific DRG
 Shift critical for hospitals because Medicare was the
largest single payer of hospital charges
(cont'd)

 Once reimbursement revolution began, private
insurance companies initiated similar reimbursement
arrangements
 Medicare extended financing revolution to physician
reimbursement in the early 1990s and initiated the
resource-based relative value scale (RBRVS)
 RBRVS brought physician reimbursement more in
line with skills required and actual time spent on
procedures
(cont'd)

 Managed care
 Encompasses several different approaches
• Health maintenance organizations (HMOs)
• Preferred provider organizations (PPOs)
• Point-of-service plan (POS)
• The insurance company, a peer review organization, or
another review mechanism evaluates patient’s medical
options and brings cost consciousness to bear on medical
decision making
(cont'd)

 Primary commonality is a method to oversee the use
of health services
• Coverage may be denied (in contrast to the previous “if it
might help, do it” approach)
• Goal is to minimize payment for inappropriate or excessive
health services
 Rapid expansion of managed care in response to
numerous factors
• Overuse of medical care and resources
• Effects of employers’ health costs on business profits
• International competitiveness
(cont'd)

1. The 1983 “revolution” in health insurance
reimbursement that formed the primary method
of reimbursement in today’s health care system
was due to:
A. The inferior care provided by managed care organizations
B. Rapidly rising health care costs
C. Technological advances that increased the cost of health
care
D. The change from a prospective to a retrospective
payment system

 Lack of access to health care
 Primarily reflects a lack of health insurance coverage
 In 2010, 49.9 million people in the U.S. were
uninsured (16.3% of the population)
 Primary groups with no insurance
• Working poor employed by small firms without insurance
coverage
• Part-time workers and unemployed people
Access to Health Care and the
Uninsured and Underinsured

 Poor more likely to lack usual source of care, less
likely to use preventive services, and more likely to be
hospitalized for avoidable conditions
 Medicaid
• Combined federal and state health insurance program
• Intended to improve access to health care for the poor
• Currently covers 48.6 million people
• Recipients are not as likely to obtain needed health services
(cont'd)

 Lack of access to health care
 Underinsured and uninsured generate uncompensated care
and “bad debt” for health care providers, who must then
increase charges to paying customers (households and public
and private insurers) in a process known as “cost shifting”
 Uncompensated care and cost shifting: primary reasons some
groups advocate for national health insurance
 States have begun initiatives to assist the uninsured
 Major health care reform legislation was passed by Congress in
2010; impact will become evident as legislation moves to
implementation in the coming years
(cont'd)

 Expands health insurance coverage to uninsured
Americans while controlling costs and improving the
quality of health care
 Individual mandate for U.S citizens and legal
residents to be covered by a health insurance plan
 Addresses many issues including employer
requirements, health insurance exchanges, and
prevention and cost-reduction approaches
 Excellent summary of the legislation is available at
www.kff.org
Patient Protection and Affordable
Care Act (PPACA)

2. What is one rationale in support of health care
reform?
A. The percentage of the gross domestic product
(GDP) for health care in the United States is less
than in countries with national health insurance.
B. Uninsured populations generate uncompensated
care costs, leading to a process known as cost
shifting.
C. Medicaid limits coverage to those who are at or
below poverty level.
D. The government does a better job of managing
expenditures when compared with private
companies.

 Health resources
 “Labor” or inputs devoted to producing health care
• Nurses, physicians, pharmacists, technicians, administrators
• Education and training for “labor”
 “Capital,” including all medical facilities and
equipment available
 “Land,” including the actual land area for hospitals
and other facilities
 “Entrepreneurship” encompasses skills and risk taking
that businesspersons bring to health care
organizations
Allocation of Health
Care Resources

 Resource allocation questions
 What share of all goods and services should be
devoted to health care?
 If expenditures devoted to health care increase, what
non─health goods and services can be eliminated?
 What combination of health care services should be
produced?
 Who should receive medical goods and services?
 Will high-tech, institution-based services be
emphasized over a prevention-oriented health
system?
Allocation of Health
Care Resources (cont'd)

 Market system
 Means by which a buyer and a seller come together
so the buyer can purchase products or services from
the seller
 Implies private ownership of resources and private
decision making by consumers about their purchases
and by businesses about their products and sales
Economic Approaches to
Allocating Health Care

 U.S. economy founded on the principles of a
competitive market system
• Numerous buyers and sellers in the market, so no single
seller can manipulate the price
• Consumers and sellers are well informed about market
conditions and prices
• New resources are free to enter and leave this market
Allocating Health Care (cont'd)

 Regulated market system
 Implies some sort of government control over
business owners/sellers
 U.S. health care system is a regulated market system
because it is regulated to some extent by federal or
state legislation
 Most European countries include a substantial
amount of government planning in their health
systems

 U.S. system violates principles of competitive market
• Consumers may not know what health care to purchase
without a provider’s diagnosis
• Difficult to get information about prices of services
• Providers may be in charge of decision making about what
services the patient needs
• Provider’s reimbursement incentives may encourage
overuse or underuse of treatment options
• Consumers often pay less than full price because the health
insurance may pay part or all of the costs
• With health insurance, the consumer may perceive health
care as cheaper than it is and may be motivated to
overconsume

 Third-party payers
 Entities other than the patient that assume
responsibility for payment (e.g., health insurance
company)
 Interfere with common principles of a competitive
market system

 Private insurance
 Accounts for the largest percentage of coverage for health
care
 Cost of health insurance to employees passed on by the
employer to the consumer
 Everyone pays part of the country’s health care cost in
every purchase made
 Individuals also pay a portion of their health care directly
through payments for insurance premiums, deductibles,
and copayments
 With managed care products such as HMOs and PPOs,
the premium the consumer pays for coverage has
continued to rise
How Health Care Is Paid

 Public insurance: Medicare and Medicaid
 Government is the biggest influence in the health
insurance market, generating 50% of hospital
revenues and 25% of physician incomes
 Medicare
• Largest health insurance program in the U.S.
• Entitlement program based on age or disability criteria rather
than on need
• Part A covers inpatient hospital services, skilled nursing
facilities (SNFs), and home health benefits
• Part B covers physician services
• Part D provides a prescription medication benefit
How Health Care Is Paid (cont'd)

 Medicaid
• Joint federal-state program to provide health insurance
coverage for impoverished families
• Covers primarily disabled persons, low-income households
with children, and those in nursing homes who qualify on the
basis of low income
• Primary payer of long-term care nationwide
• For most states, Medicaid represents the fastest growing
component in the state budget

 Effect of payment modes
 Provide incentives for increased efficiency and cost-
effectiveness of care
• Growth of free-standing clinics and outpatient centers
• Care settings shifting from acute care to community-based
sites
• Health care is shifting to an increased emphasis on
preventive care
• Nonetheless, health costs remain the fastest increasing
element in federal and state budgets

 New methods of payment modes to control cost and
quality
• Pay-for-performance: method of reimbursing providers based
on the quality of care provided with an emphasis on disease
prevention and reduction of complications
• Never events
 Medicare no longer pays hospitals for the extra cost of treating
preventable errors commonly referred to as never events
 Purpose is to encourage hospitals to direct resources to
preventing errors rather than being paid for them
 Never events include hospital-acquired infections, injuries from
falls, wrong site surgery, mismatched blood transfusions, and
others

 Nurses a major force in health care delivery
 Ensure positive patient outcomes and maximize reimbursement
 American Nurses Association’s Health System Reform Agenda
• Supports quality health care as a basic human right and
universal access to health care for all U.S. citizens
• Confirms that the health care policies must be outcomes
based and reflect the IOM’s six quality aims for health care:
safe, effective, efficient, timely, patient-centered, and
equitable
• Targets primary care to lower dependence on costly
secondary and tertiary care
• Advocates team approach that includes consumers,
providers, policymakers, and industry leaders to create an
affordable health care system
Implications for Nursing

 Nursing and health care finance decisions
 Changes in health care financing directly affect
professional nursing practice
 Government policy influences the public’s openness
to securing services from various professionals such
as nurse practitioners
 Financing affects salaried employees because
providers build job opportunities on the basis of
payment sources
 Payment modes determine whether a particular
nursing role will be reimbursed
Implications for Nursing (cont'd)

 Efficiency and effectiveness of care
 Care coordination: decrease duplication of services
and reduce wasted health care resources
 Case management: ensure that patients get effective
treatment at the appropriate level of care
 Disease management: manage and improve the
health status of a defined patient population over the
course of a disease
 Outcomes management: demonstrate efficiency of
care via measurable, effective outcomes

 Expansion of technology
 Under examination for cost-efficiency vs. outcome
delivery
 Nurses will play a key role in educating patients and
families about the cost/benefit ratio and assist in
selecting alternatives
 Internet offers promise for innovative programs
 Nurses can combine clinical skills with information
technology skills to meet a critical need for health
information and data management

 Consumer empowerment
 Customers or patients as health care consumers are
demanding quality services at affordable rates
 Nurses must understand and provide customer-
focused care
 New relationships with consumers are developing that
emphasize cost sharing based on individual health
practices

 Legislation is in place to protect individuals enrolled in
managed care plans: access, quality, cost
 Nurses can take the lead in demonstrating the value
of wellness and of teaching health consciousness
 Reducing health care costs as a consumer

• Take good care of yourself; manage minor illnesses by
yourself at home
• Use the Internet to learn more about your health and ways of
preventing disease
• Recognize early warning signs of disease and get prompt
treatment
• Practice preventive health with health screenings and routine
self-examinations
• Develop an active relationship with health care providers to
improve communication

• Use emergency care only in emergencies
• Know health risks for lifestyle choices, such as alcohol and
drug use, dietary habits, sedentary behaviors, safety at
home, and driving

Chapter 07

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Chapter 07

Editor's Notes