HSCI 678 Intro to US Healthcare System

Financing the U.S. Health Services System

Chapter 7

Dr. Tracey Lynn Koehlmoos

Alibis

• Nurse Revitalization Act of 2002

• ACHE: American College of Health Care Executives

• HIPAA, HIPAA, HIPPA!– Health Insurance Portability and

Accountability Act of 1996

Follow the money trail

• US unique among industrialized nations

• Highest per capita expenditures

• Up to 20% of population no access

• Complex system– Payment Mechanisms– Expenditures– Trends

History Lesson

• WWII: First taste of systematic care– For soldiers and families– Compensation for workers’ frozen wages

• Post WWII: – Expectation of health services benefits– 1945: 32 million with hospital insurance– 1960: 122 million– Physician services: 5 million to 83 million

Take home lesson

• Early events in the financial evolution emanated from the private sector.

• Private sector continues to have strong influence in the financing of the US healthcare system.

Revenue

• 55% Private funds

• 45% Public funds

Revenue Sources

34%

15%17%

12%

16%

6%

Private Insurance

Out of Pocket

Medicare

Other Public

Medicaid/SCHIP

Other Private

Expenditures

• In 2000, $ 1.3 trillion on health services

• In 2000, US spent $4,094 per person

• Two types– Personal health services—89%– Non personal health services—11%

Personal Health Services

• Hospital Care: 33.3%

• Physician Services: 22%

• Drugs: 10%

• Nursing Home: 7%

• Home Health: 2%

• Other personal care: 9%

• Other medical products: 4%

Non-Personal Health Services

• Program administration: 6%

• Research and Construction: 3%

• Public Health: 3%

• Percentages are part of total expenditures

Per Capita Expenditures

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

$5,000

1960 1970 1980 1990 2000

Reasons for Expenditure Increase

• General Inflation• Medical Price Inflation• Availability of Health Insurance• Population Growth• Increased number of elderly• Creation of more expensive technology• Fraud and abuse• Market Failure• And many more….

Inflation’s Effects

• Greatest influence on expenditure growth

• Some researchers:– 70% of health care increase due to inflation– Medical prices increase 44% faster than

consumer prices (1970’s and 1980’s)

Role of Health Insurance

• Expenditure growth due to “insolating effect” of health insurance

• Health Economics 101– People behave rationally– Not in health care– Not with health insurance

• Loss of individual accountability

Demographic Effects

• Population growth

• Elderly population growth– Reduced health status– Increased health services utilization

• Aging population accounts for 10% of the increase in health expenditures

Technology

• US—one of the most advanced systems in the world

• Advances account for 20% increase in expenditures

Other Affecting Factors

• Proportion of GDP– Increased salaries– Increased willingness to pay for healthcare

• Expanding Services to New Groups– Elderly– Low-Income Children and their caretakers– Disabled

More Affecting Factors

• Administrative Costs– Complex system, Multi-layers– Greater admin costs– Per capita: US $497 v. Canada $156

• Fraud and Abuse– Believed to contribute 10% to total

expenditures– Practice of defensive medicine (excessive

care to avoid malpractice)– Price of Malpractice premiums

More Affecting Factors

• Growth of Government Programs– Increased access = increased expenditures– 30% of Medicare for 6% of beneficiaries in the

last year of life– 29% of Medicare and Medicaid payments for

elderly are for patients in the last year of life

More Affecting Factors

• Acute v. Preventative Care– Most US health services are curative– Preventative, Promotion < 3% of $$$– Preventable diseases constitute 70% of

illnesses and associated costs– 8 of 9 leading causes of death in US are from

preventable causes—mostly related to lifestyle choices

The Last BIG Affecting Factor

• Market Failure Economic commodity v. Social Good

• WHY?– Consumers lack information– Physicians have decision making authority– Third party payers dominate – Ineffective price competition– Providers payment mechanisms (later…)– Government subsidizes the market

Expenditure Projections

• Indicators point to continuing increase

• By 2065 Health Expenditures will consume MORE THAN 25% of GDP

Efforts at Cost Containment

• Major initiatives have failed• One brief & shinning moment of success:

– Late 80’s, early 1990’s– Medicare’s Prospective Payment System– Spread of Managed Care– Reduced Inpatient Hospital Costs by 30%

– The bad news: Outpatient $ quickly exceeded!

Provider Payment Mechanisms

• Provider Payment affects expenditures

• Four types of payment– Fee for Service– Flat Fee Per Medical Case– Flat Fee Per Patient per Month/Year– Global Budgeting

Fee-for-Service

• Hospitals: paid per day

• Physicians: paid per each service/visit

• Medicare started UCR (Usual, Customer & Reasonable) to account for geographic price variation

• Medicare “assignment”, physician “accepted” rates

• Perverse incentive (promotes over-service)

Flat Fee Per Case

• A.K.A.: Prospective Payment System (PPS)

• Medicare instituted PPS in 1983 (TEFRA)

• Diagnostic Related Groups (DRG’s)

• Set payment for each DRG

• Geographic variation, outlier exclusions

• Children’s, Psych, Rehab and Short Stay hospitals are not paid by PPS

RBRVS

• Resource Based Relative Value Scale

• 1992, Medicare physician reimbursement

• To better reimburse, more fairly reimburse– Cognitive and time consuming

v. technical and procedural– History taking, physical exams, counseling

Capitation

• Flat Fee per Patient per Month/Year

• HMO and Managed Care mainstay

• Providers share in the risk!

• Provider incentive: keep patients well, but avoid costly care

• Potential for underservice

Capitations and Expenditures

• If we went with HMO’s, we’d reduce 10%

• More research is needed as managed care extends its grasp

• However, HMO-backlash means pure capitation payment methods are vanishing

Global Budgeting

• Canadian healthcare system

• Provinces provide a lump sum to hospitals.

• Why are we even talking about this?

Tax Expenditures

• Employer health premiums are not taxed

• Federal and State governments lose billions in tax revenue

• Employee-taxable income of employer-paid premiums causes a $141 billion tax expenditure (or loss to the govt.)

Industry Expenditures

• Business and industry spends an excessive amount on employee health benefits

• 1990, 61.1% of pre-tax profit went to health expenditures!

Employee Cost Sharing

• Companies are increasing cost-sharing

• Larger deductibles, larger premiums

• More refusals of care, self-insuring

• Fewer businesses offering benefit

• Real cash wages have remained steady for two decades because of the increasing cost of health insurance.

Summary

• Private and Public financing of US system

• Highest per capita expenses in the world

• 20% of population, no access to system

• Increasing proportion of GDP (16%)

• Initiatives have failed—because they only target a part of the system