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

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

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