1. The Structure & Future Viability of the Medicare System with Respect to Physicians Richmond Academy of Medicine September 14, 2004 Rick Mayes, Ph.D. Assistant Professor of Public Policy

2. 2 Overview This presentation examines: 1.Larger trends in the U.S. health care system, generally, and in Medicare, specifically 2.Issues of specific concern to physicians (and their patients) 3.Medicare’s relationship with physicians and the controversy over increasing market segmentation

3. 3 Underlying Medical Inflation: Health Insurance Premiums Sources: Census Bureau, Kaiser Foundation, CMS, 2004.

4. 4 The Rise and Fall (and Rise Again?) of Managed Care

5. 5 Since 2001, on average... -5 million fewer jobs now provide health insurance -health insurance premiums have increased 59% (versus 10% in general inflation, as measured by the CPI) -employee contributions for health insurance have grown: by 57% for single coverage ($3,695 annually in 2004) by 49% for family coverage ($9,950 annually in 2004) - A growing proportion of the overall increase in premiums for employers has been “shared” with employees, particularly those in small businesses. Underlying Medical Inflation: Health Insurance Premiums Source: Henry J. Kaiser Family Foundation/Health Research and Education Trust Survey of Employer Health Benefits, Health Affairs Sept./Oct. 2004.

6. 6 Health Insurance Premiums & Declining Coverage

7. 7

8. 8 Underlying Medical Inflation Affecting Medicare Population Source: CMS Office of the Actuary, 2004.

9. 9 Demographic Trends Source: Medicare Board of Trustees, 2003.

10. 10 Actuarial Trends Source: Medicare Board of Trustees, 2003.

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12. 12 Medicare’s new $534 billion Rx Drug Benefit

13. 13 Tom Scully, former CMS Administrator “I hate this whole God---- system. I’d blow it up if I could, but I’m stuck with it. If it were up to me, I’d buy everybody private insurance and forget about it. Obviously that’s what the Republican view is. We ought to do the same thing we do for federal employees: go out and buy every senior citizen a community-rated, structured, regulated private insurance plan. Let them buy an Aetna product, or Blue Cross products. That’s the Republican philosophy. Why should Tom Scully and his staff fix prices for every doctor and hospital in America? Which is what we do. - Interview with Tom Scully, Administrator, Ctrs. for Medicare & Medicaid Services, 2001-2003

14. 14 Issues of Concern for Physicians: Growing Practice Expenses

15. 15 Liability Insurance Crisis Source: New England Journal of Medicine, AMA, 2003.

16. 16 Issues of Concern for Physicians: Growing Practice Expenses Source: CMS, Office of the Actuary, 2004.

17. Cross-Subsidization “Hydraulic" 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 110% 120% 130% Cost 1080907060504030200100 Below Cost PayersAbove Cost Payers Payment-to-Cost Ratio Percentage of Market Share B =C + Margin Contribution Margin Cost Shift Shortfall A B C

18. 18 Segmentation & the Role of Cross-Subsidization Source: The Lewin Group, “The American College of Emergency Physicians (ACEP) Practice Expense Study,” for the American College of Emergency Physicians, September 15, 1998.

19. 19 Source:The Lewin Group analysis of data contained in AHA TrendWatch Chartbook: Trends Affecting Hospitals and Health Systems, 2001. The correlation coefficient between Private Payer Payment-to-Cost Ratio and Medicare, Medicaid & Uncompensated Care cost shift burden is 0.753 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200% 0%5%10%15%20%25% Medicare, Medicaid & Uncompensated Care Cost Shift Burden (in %) by State Private Payer Payment-to-Cost Ratio Segmentation & the Role of Cross-Subsidization

20. 20 Source: MedPAC (June 2004) Segmentation of U.S. Health Care System Increasing

21. 21 Source: CMS, Office of the Actuary, 2004. Segmentation of U.S. Health Care System Increasing

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23. 23 Policy implications of the significant rise in physician-owned: ambulatory surgery centers, specialty hospitals, and diagnostic imaging centers: 1.) prospects for improved quality, lower costs, and more professional autonomy - not a new phenomenon (e.g., heart hospitals in London 1857, psychiatry clinics, ear and eye hospitals, obstetrics & gynecology hospitals) - Adam Smith and the advantages of specialization (e.g., pins and “focused factories”) 2.) financial impact on community hospitals: fair or unfair competition? - “cherry picking” the best-insured private patients by, largely, for-profit entities - “skimming” lower-cost, healthier Medicare cases within individual DRGs - cardiac, orthopedic, radiological services: huge proportion of hospitals’ net revenues 3.) impact on communities’ overall access to care - declining volume & smaller patient populations make charity care harder to provide - vulnerability of emergency services, burn units, psychiatric facilities - complicates doctor-hospital relationships (e.g. staff privileges, economic credentialing) - can exacerbate the development of a multi-tiered health care system

24. 24 Conclusion : What Should the Government Pay Medical Providers? TOM SCULLY: “My frustration is that you’re trying to be a government contractor. Hospitals usually get about 50% of their revenues from Medicare & Medicaid; doctors, on average, generally come into practice getting roughly 50% from Medicare & Medicaid. So if you’re a doctor or if you’re a hospital, fundamentally a big chunk of your business is as a government contractor. And your expectation, I think, when dealing with the government— whether you’re in the Pentagon or in health care—is boring consistency, decent operating margins that don’t flop around. If you’re Boeing, you don’t want to have a 25% margin one year and a negative 2% the next year, right?” - Interview with Tom Scully, Administrator, Ctrs. for Medicare & Medicaid Services, 2001-2003