1. Introduction to Health Care Finance

2. Outline How much do we spend on health care? Who pays for health care?
What are the different types of health insurance?
How do physicians receive compensation via the different forms of payment?

3. National Health Expenditures per Capita, 1990-2018
$13,100
(2018)
Actual
Projected
$8,160
(2009)
$2,814
(1990)
Source: Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group, at (Historical data from NHE summary including share of GDP, CY , file nhegdp07.zip; Projected data from NHE Projections , Forecast summary and selected tables, file proj2008.pdf).

5. NHE Total Expenditures: $2,700.7 billion
Distribution of National Health Expenditures, by Type of Service (in Billions), 2011
NHE Total Expenditures: $2,700.7 billion
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 (see Historical; National Health Expenditures by type of service and source of funds, CY ; file nhe2011.zip).

6. Factors Accounting For Growth In Per Capita National Health Expenditures And Personal Health Care Expenditures, Selected Calendar Years 2004–11.
Factors Accounting For Growth In Per Capita National Health Expenditures And Personal Health Care Expenditures, Selected Calendar Years 2004–11
Hartman M et al. Health Aff 2013;32:87-99
©2013 by Project HOPE - The People-to-People Health Foundation, Inc.

7. Wages Private Group Health Insurance
56.3% of GDP
Other Fringe Benefits and Payroll Taxes
Wages
45.6%
Although total compensation – wages plus benefits – has remained fairly stable as a share of our nation's economy since 1960, health benefit costs paid by employers has risen from 0.6 percent of GDP in 1960 to 4.1 percent in 2006.
2006 7

8. Cumulative Increases in Health Insurance Premiums, Workers’ Contributions to Premiums, Inflation, and Workers’ Earnings,
SOURCE: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, Bureau of Labor Statistics, Consumer Price Index, U.S. City Average of Annual Inflation (April to April), ; Bureau of Labor Statistics, Seasonally Adjusted Data from the Current Employment Statistics Survey, (April to April).

9. Impact of Unemployment Growth on Medicaid and SCHIP and the Number Uninsured
$3.4
$1.4
State
1.1
1.0 = 1%
&
Increase in National Unemployment Rate
$2.0
Federal
Increase in Medicaid and SCHIP Enrollment
(million)
Increase in Uninsured
(million)
A one percent rise in the nation's unemployment rate is projected to increase the number of uninsured by 1.1 million and result in an additional 1 million (600,000 children and 400,000 adults) enrolling in Medicaid, increasing state Medicaid spending by $1.4 billion at time when their tax revenues would fall by 3 to 4 percent.
Increase in Medicaid and SCHIP Spending
(billion)
Source: Stan Dorn, Bowen Garrett, John Holahan, and Aimee Williams, Medicaid, SCHIP and Economic Downturn: Policy Challenges and Policy Responses, prepared for the Kaiser Commission on Medicaid and the Uninsured, April 2008 9

10. Putting Off Care Because of Cost
In the past 12 months, have you or another family member living in your household… because of the COST, or not?
Percent saying “yes”
Relied on home remedies or over the counter drugs instead of seeing a doctor
Skipped dental care or checkups
Put off or postponed getting health care you needed
Not filled a prescription for a medicine
Skipped recommended medical test or treatment
Cut pills in half or skipped doses of medicine
Had problems getting mental health care
Did ANY of the above
Source: Kaiser Family Foundation Health Tracking Poll (conducted November 5-12, 2009) 10

12. Why is it important? US compared to OECD countries
Health expenditures grew rapidly between for most countries.
Rates continued to rise into the 1990s-2000s in US.
The US is the biggest spender in terms of GDP for health care. Spends twice as much as the UK (national health insurance).

13. Ranking methodology subjected to significant criticism in academic circles (Science, Health Economics)
•But oft cited as ‘authoritative’nonetheless …
•Relatively poor U.S. rank in part attributable to
–High levels of health spending
–Relatively mediocre population health outcomes
–Inequitable access for the uninsured 4

18. Who Pays for Health Care?
Private Insurance
Employer Based
Direct Purchase
Government Insurance
Medicare
Medicaid
Military
Other (SCHIP and TANF)
You – out of pocket expenses

19. Simple Organizational Chart How Do Dollars Flow?

20. Federal Programs Medicare Medicaid Military health programs
100% federal pay
run by the feds
elderly, disabled people under Supplemental Security Income (SSI)
Medicaid
1/3-1/2 cost share by the states
run by states
poor people, often old, nursing homes, disable
falls apart when folks need it most
Military health programs
Getting to be big dollars, usually left off the graph

22. Types of Medicare Part A Part B Part C Part D
is the part of Medicare coverage that covers major illnesses and end-of-life care issues. This may include services such as inpatient hospital care and hospice care.
Part B
is a type of Medicare that covers normal doctor's visits and other minor issues
Part C
Part D

23. Medicare Part C

24. Medicare Part C (AKA Medicare Advantage Plan or Medicare Choice)
Helps people afford private insurance
will completely replace both Medicare Part A and Part B.
It may also require an additional premium payment.

25. Medicare Part D
to subsidize the costs of prescription drugs for Medicare beneficiaries in the United States.
It was enacted as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA)
Effective date: January 1, 2006.

26. Key features

27. From: Peter Orszag - Director CBO

28. Medicare Spending as a Share of Total Federal Outlays, FY2010
2010 Total Outlays = $3.5 trillion
SOURCE: OMB, Fiscal Year 2010 Budget, February Budget Summary by Category.

29. Private Insurance Types of Private Insurance
EPO (HMO) a managed health care unit
High premiums, low deductible and/or co-payments
Limits choices, but also limits cost
PPO
Low premiums, high deductible and/or co-payments
Offers more choice
Health Savings Account (HSA)
Provides a tax-shelter to self insurer.

31. Why do we need Insurance?

32. What is insurance? Consider a club 100 members
About the same age, about the same lifestyles
About once a year one of the members gets sick and incurs expenses of $1,000.
Club collects $10 from each member each year.
Invests it somewhere to maintain or increase its value.
Pays it out to members who file claims.

33. What has happened?
Insured pay $10 per year, guaranteed, to avoid the possibility of having to pay $1,000.
Although outlays for an individual may be highly variable,
Outlays for a group are generally rather predictable.
The “Law of Large Numbers” suggests that as group size increases, the distribution of the average rate of illness will collapse around the “true” probability of the illness.

34. Insurance Terms Moral Hazard Adverse Selection
occurs when a party insulated from risk may behave differently than it would behave if it were fully exposed to the risk.
Typically occurs after you have insurance
Adverse Selection
Lemons problem
It refers to a market process in which "bad" results occur when buyers and sellers have asymmetric information (i.e. access to different information): the "bad" products or customers are more likely to be selected.
Typically occurs before you have insurance

35. Insurance Terms Premium - $X premium for $Y of coverage.
Coinsurance and Copayment - The insured person must pay the loss.
% paid is the coinsurance rate (varies from 0 to 100%).
amount paid is the copayment.
Deductible - Some amount may be deducted from the payment to the insured person, irrespective of coinsurance.
Why coinsurance and deductibles? Discuss.

36. Let’s Review Coinsurance40
Suppose a visit costs $20.
BUT, insurance pays 50%. 40
Effective demand 30 30
Money Price 20
Effective Price 20
Money price demand 10 10
Visits

37. What Does Moral Hazard Do?
It makes us spend too much on medical care.
Demand
Demand w/
insurance
Price
At P1, we buy Q1 and spend E1.
With insurance, we pay LESS than full price, so we buy Q2, spend E2. This is P1 (Q2 - Q1) more than we spent before.
Why is it too much? P1
Exp. Q1 Q2
Quantity

38. What Does Moral Hazard Do?
Why is it too much? We paid P1 (Q2 - Q1) more.
Demand
Demand w/
insurance
Price
The demand curve tells us what the care is worth to us. So the additional (Q2 - Q1) is worth: P1
Exp.
Wasted
Value
The “wasted” expenditures are: Q1 Q2
Quantity

39. For the Entire Economy it’s WORSE
Demand w/
insurance
Why is it too much? We paid P1 (Q2 - Q1) more.
Demand
Price
The demand curve tells us what the care is worth to us. So the additional (Q2 - Q1) is worth: P1
Exp.
Wasted
Value
Supply
The “wasted” expenditures are: Q1 Q2
Quantity

40. Risk and Insurance What is “expected value?”
What’s the expected value of a coin flip that pays $1 for heads and 0 for tails.
A> Probability of heads * $1 + Probability of tails * 0.
E = 0.5 * * $0 = $0.5
How much would you pay to play this kind of game?
Why do we care?
A> Because insurance is based on expected losses!

41. Anatomy of an Insurance Premium
The amount paid for insurance can be separated into two parts.
Actuarially fair premium
Loading fee
Expected Cost
Loading Fee
Premium

42. Loading Fee Administration Costs Legal Fees Profits
10 – 15% of a premium

43. Why do I need to know all of this insurance stuff?
You will most likely work in one of two environments
“Fee-for-Service”
There is a menu of services and each service has a price.
“Capitation”
Physicians offer a bundle of services at one flat price per patient.

44. Financial Risk Arrayed on a Spectrum from Full Risk for the Insurer to Full Risk for the Provider

45. Fee for Service vs. Capitation

46. Fee for Service Advantage Disadvantage Bundle Payment – See the ACA
No risk associated with cost
You are encouraged to see many patients and perform many services
Disadvantage
You have “no skin” in the medical options therefore you tend to over-supply and run up health care cost
Bundle Payment – See the ACA

48. Capitation
Capitation - Physician receives a fixed payment per person in return for providing medical services regardless of the quantity of medical care delivered.
e.g. A physician may receive $9 per member per month for each enrollee who chooses an HMO plan and elects him to be their primary care caregiver.

49. Capitation Physician has an incentive to restrict # of patient visits.
Problem - Physician can reduce visits by referring patients to other providers in the same HMO plan.
e.g. If the patient has high blood pressure, refer her to a cardiologist.
Solution - Withholding

50. Advantages of Capitation
Increased clinical autonomy
Physician financially responsible for cost overruns
Eliminates need for external review
Increased income
Physician compensated by risk pools created from withholds if can reduce utilization of hospital, outpatient, diagnostics, other ancillary services

51. Healthcare Reform Bill

52. Questions About the ACA
Are the health exchange open to everyone?
No, only to those not receiving health insurance from their employer
Will I receive a subsidy to buy health insurance?
If you're an individual making up to $45,950, you should be eligible for at least a bit of a subsidy.

53. Questions About the ACA
What are the employer penalties
$2,000 excluding the first 30 employees, but the average family cost of insurance for an employer is $11,429

54. Questions About the ACA
What is the individual penalty?
In 2014, the annual penalty will be $95 per adult and $47.50 per child, up to a family maximum of $285 or 1 percent of family income, whichever is greater.
In 2015, the penalty will be $325 per adult and $ per child, up to a family maximum of $975 or 2 percent of family income, whichever is greater.
In 2016, the penalty will be $695 per adult and $ per child, up to a family maximum of $2,085 or 2.5 percent of family income, whichever is greater.

57. Per Capita Annual Health Care Spending Of Respondents To The Medical Expenditure Panel Survey, 2000–09, By Care Setting And Nativity And Legal Status.
Per Capita Annual Health Care Spending Of Respondents To The Medical Expenditure Panel Survey, 2000–09, By Care Setting And Nativity And Legal Status
Stimpson J P et al. Health Aff doi: /hlthaff
©2013 by Project HOPE - The People-to-People Health Foundation, Inc.

58. How Not to Become Dr. Cox
Be a Doctor because you want it! Not your parents, not your friends, not because society may think it is good.
Always be nice to others: especially nurses, therapists, secretaries, etc . . They will save you one day or throw you under the bus.