Economic Relationships in Health Care Peter Farrow – CEO & General Manager –

Overview Characteristics of a Free Market Health Care vs. Health Insurance Does Price Sensitivity Exist? Health Care Reform and the Future

Characteristics of a Free Market Driven by Supply and Demand Allocates resources based on a price mechanism Requires full information and freedom of choice

Health Care vs. Health Insurance Health Care – Little price sensitivity – Little information for decision making – Loose exchange transaction between end consumer (patient) and supplier (clinician)

Health Care vs. Health Insurance (cont’d) Health Insurance (Group) – Near commodity – High price sensitivity – Easy comparisons of products – Low barrier to switch or substitute Health Insurance Not Just Intermediary – Real Purpose is to pool risk to indemnify from catastrophic loss

Typical Market Exchange Patient (Consumer) Provider (Supplier) Payment Services

Health Care/ Insurance Exchange Patient (Consumer) Provider (Supplier) Payment Services Insurer Payment Service Request Service Authorization

What’s Missing in Health Care? Adam Smith’s theory of “the invisible hand” - self-interest (profit motive) guides the most efficient use of resources in a nation's economy. Detachment of trade (payment for goods) eliminates the self-interest. Consumers have “already paid for health care” through insurance, so they have no self-interest to conserve. Providers have low risk in losing “customers,” because they are not directly paying for services.

Managed Care – Market Based Regulation? As third party in transaction, managed care techniques were an attempt to provide “regulation” to an exchange uncontrolled by economic interests. − Prior Authorization − Utilization Review − Limited Networks − Case Management − Cost Sharing “Self-interest” appeared in managed care, forcing backlash and easing of techniques used to bring efficiency to transaction. Change was, in part, cause of another spike in health care costs.

What Should Health Care Market Look Like? Patient (Consumer) Provider (Supplier) Payment Services Payor needs to function as surrogate, or representative, of one or the other.

Is There Hope? Does Any Price Sensitivity Exist in Current Health Care Economy? – Employers and Members increasing cost sharing (copays and deductibles) – Employers pushing Health Savings Accounts – Wellness programs becoming more popular People realizing that improved health will lower health care costs – Hospitals report 5+% decrease in revenue during recession.

Analogy to Current Situation Early 1970s - Low prices for gasoline: – Large cars – Little conservation – No attention to mileage

History of Gasoline Prices

What Happened When Gas Prices Spiked? Mid to Late 1970s – Demand for smaller cars – Mileage becomes important – Car-pooling and other conservation techniques become popular – Summary – When prices increased enough, consumers changed habits significantly Today – Higher mileage (conservation) – Alternative fuel development (substitution)

Percentage of Household Expenditures for Health Care All households – Bureau of Labor Statistics

“Health Care, Health Insurance and the Distribution of American Incomes” 2009

Health Care Reform Positives: – Reduces level of uninsured – Largely maintains employer-based system – No new government-run plan – Expands access to coverage – Maintains state regulation under federal framework – Should create some parity in costs through subsidies

Health Care Reform (cont’d) Challenges – Does not address increasing health care costs. – Does not aggressively address quality. – Includes a variety of new taxes. – Significant federal control. – Too focused on who pays and not enough on what we are paying for. – Individual premiums increased by well over 20%, just because of reforms.

“Health Care, Health Insurance and the Distribution of American Incomes” 2009

Misleading Rhetoric “Medicare administrative costs are cheaper than insurance companies.” Medicare doesn’t have many costs that health insurers have, such as sales costs, appropriate level of fraud prevention, disease management, nurse lines, compliance reporting, taxes, etc.

How Do We Control Costs? Bring consumer into the equation more. – Index pricing – Transparency in medical pricing Increase role of wellness and health promotion. – Increase engagement – Re-educate people on lifestyle and diet Payers need to function more as “buyers” for consumers – to represent consumers.

What Should Health Care Reform Look Like? Focus on what is provided in care: – Is it necessary? – Is it high quality? – Is it cost effective? Ensure that patients receive “the right care at the right place at the right time.” (Institute of Medicine) Create incentives to drive quality and preventive care, not just procedures. Create Better Market Forces

Are We Getting Effective Care? The First National Report Card on Quality of Health Care in America, Rand Corp. 2006

Does Coverage Matter?

Recommended Reading Redefining Health Care – Michael Porter The History of Health Care Costs and Health Insurance – A Wisconsin Primer Wisconsin Policy Research Institute Crossing the Quality Chasm: A New Health System for the 21st Century – Institute of Medicine

The significant problems we face cannot be solved at the same level of thinking we were at when we created them. - Albert Einstein

Questions?

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