1. The Economics and Financial Management of Health Care Providers
Day 1 Morning Session 2016
Robert Bushman

2. Class Overview: Three distinct views of healthcare provider economics
Economy-level view of financial, political and regulatory challenges in healthcare :
The financial condition of the U.S. Government as a major healthcare player as viewed through the 2015 Financial Report of the United States
Economic growth and government healthcare commitments
Incentives created by the ACA and its effects on supply and demand for labor in U.S.
Market-level view of health care organizations and the competitive/regulatory landscape:
Competition in healthcare sector with a focus on market structure, bargaining power, and impacts of regulation and politics on competition
The healthcare value chain as reflected in financial statements of HC providers
Micro-level view from inside of provider organizations :
Value measurement to transform quality & controlling costs in healthcare:
Improving cost measurement accuracy for patients and treatments
Outcome measurement and transparency on providers’ incentives and behavior
Implications of different financial reimbursement mechanisms on 3 levels: the medical condition, hospital and physician levels.
Incentives

4. Competition for available pool of health care dollars
Taxes
Debt
Money Printing
$ Government
Private $
Pre-tax earnings
After tax earnings
Savings
$ Pool
Medicare
Medicaid
Subsidies
Employers
Employees
Individuals
Providers:
Hospitals
Doctors
Nurses
Clinics
Nursing Homes
Insurers
Pharma
Lawyers
Biotech
Consultants/Academics
Medical Equipment
Unions
Distributors/Supply Chain
Politicians

5. What determines the allocation of the available pool of health care dollars?

6. What determines the allocation of the available pool of health care dollars?

7. Health Care Economics and the U.S. Government

8. Design of U.S. Constitutional Government
as conceived  230 years ago (9/17/1787)

9. The Reporting Entity

10. government institutions that don’t exist in reality.
Nirvana?
Government regulation is generally rationalized by some perceived market failure.
The market is not working perfectly; therefore the government must ride to the rescue and fix it.
However, while markets may be imperfect, so is government!
The Nirvana Fallacy
Regulation is justified by comparing imperfect market outcomes to imaginary utopian outcomes deriving from over-idealized
government institutions that don’t exist in reality.

11. Road to Nirvana is paved with regulations?
Composition & evolution of regulation from 1960 to the present
the daily journal of the federal government in which all newly proposed rules are published along with final rules, executive orders, and other agency notices—
The Code of Federal Regulations (CFR) is the codification of all rules and regulations promulgated by federal agencies. Its size (which has grown from 22,877 pages in 1960 to 175,268 at the end of 2014) provides a sense of the scope of existing regulations with which American businesses, workers, and consumers must comply.
Provides a sense of the flow of new regulations issued during a given period => how regulatory burden will grow as Americans try to comply with the new mandates
Provides a sense of the scope of existing regulations with which American businesses, workers, and consumers must comply

17. Income Statement
Balance Sheet
Off-balance sheet
liabilities

18. U.S. Government “Income Statement”
Total
Spending

19. Total Cost (Spending)

20. Spending Across Years

22. U.S. Government “Income Statement
Total
Spending
Tax
Revenue

23. Sources of Tax Revenues: The Tax Base
excise taxes, unemployment taxes,
customs duties

24. 46%
68%

26. U.S. Government “Income Statement
Total
Spending
Tax
Revenue
Deficit Spending
Accrual accounting
Cash basis accounting

27. U.S. Gov’t Balance Sheet

29. U.S. Gov’t Balance Sheet
Debt Held by the Public

31. Maturity Structure of U.S. Debt Held by Public
If interest rates rise to 5 percent, i.e. back to normal, interest costs of the U.S. will increase significantly because short term debt will be re-priced at the higher rate, as will any new borrowing to finance current deficits.

32. Intra-governmental debt: The Trust Funds
In addition to debt held by the public, Government has $5.1 trillion in intra-governmental debt; arises when one part of the Gov’t borrows from another.
Represents debt issued by the Treasury and held by Government accounts, including the Social Security ($2.8 trillion) and Medicare ($262 billion) trust funds.
Because these amounts are both liabilities of the Treasury and assets of the Government trust funds, they are eliminated as part of the consolidation process for the government-wide financial statements (see Note 11).
At the end of FY 2015:
Debt held by the public + Intra-governmental debt = $18.27 trillion

33. Trust funds have an important legal meaning in that their balances are a measure of the amounts that the government has the legal authority to spend for certain purposes
under current law
$261.6 : Medicare Trust Fund
“Trust Funds” arise from U.S. Treasury spending excess tax collections earmarked to fund a particular program (e.g., medicare taxes,) giving the agency (e.g., HHS) government bonds in exchange
When these “trust fund” securities are redeemed, e.g., to pay future Social Security/Medicare benefits, the Government will need to obtain the resources necessary to reimburse the trust funds.

34. The 10,996,447 total disability beneficiaries includes:
8,942,232 disabled workers
153,475 spouses of disabled workers, and
1,900,740 children of disabled workers.

36. 75 year projected future of Social Insurance under current laws
Projections based on the economic and demographic assumptions as set forth in the relevant Social Security and Medicare trustees’ reports and in the agency financial report of HHS…
Projections based on continuation of program provisions contained in current law.

37. Medicare Total = ($27,940) billion
Off-balance sheet debt

38. Open and Closed Groups

43. A Picture of the Future!!!

44. A Picture of the Future!!! You statistically die  here
Obama’s
term ends
I statistically
die  here

45. U.S. Government is notoriously bad at predicting costs of entitlement programs!!
The law creating Medicare was passed in 1965; the consequences were immediate and dramatic.
Annual growth of physician fees went from 3.8% in 1965 to 7.8% in In the first year of Medicare's existence, hospital costs increased by 21.9%; over the subsequent five years, they grew by an average of 14% each year.
When Medicare was enacted, U.S. Congress projected that its cost would grow from under $5 billion in its first year to $12 billion in 1990.
Instead, Medicare expenditures grew at roughly 2.4 times the rate of inflation over that period, and in 1990 reached $110 billion; by 2000, $219 billion; by 2010, $520 billion ……

46. Discrepancy between health care and the rest of the economy centers on the way we pay for health care.
In most other sectors, consumers pay directly for goods and services, giving businesses a strong incentive to deliver at an attractive price.

47. Statement of Social Insurance: Sensitivity of estimates to assumptions about ACA’s impact
Affordable Care Act (ACA)
The financial projections for the Medicare program reflect substantial, but very uncertain, cost savings deriving from provisions of the Affordable Care Act.
However, improved results for Medicare depend in part on long-range feasibility of various cost-saving measures in the ACA – In particular, lower increases in Medicare payment rates to health care providers.
Without fundamental change in the current delivery system, these adjustments would probably not be viable indefinitely.
It is possible that health care providers could improve their productivity, reduce wasteful expenditures, and take other steps to keep their cost growth within the bounds imposed by the Medicare price limitations.
For such efforts to be successful … providers would have to generate and sustain unprecedented levels of productivity gains – a very challenging and uncertain prospect.

48. Financial projections incorporate: “Inpatient and Outpatient Market Basket Productivity Adjustments”
Prior to ACA, base rates for Medicare inpatient & outpatient reimbursements to providers were updated annually based on a market basket update measuring price increases for goods & services hospitals buy to produce patient care.
The ACA imposes cuts in the rate updates of provider payments by introducing a “productivity adjustment factor” into Medicare’s reimbursement rules. The productivity adjustment factor is a reduction in the regular market basket increase scheduled for various providers of medical services to Medicare patients, based on economy-wide productivity increases and measured over a rolling 10-year period preceding the year in question.
The theory is that providers of medical services to Medicare patients should be able to achieve the same level of productivity improvement as workers in the rest of the US economy.
Regardless of whether healthcare providers can actually achieve that level of productivity improvement, Medicare’s payment updates will be reduced as required by this adjustment factor.

49. Financial projections incorporate: “Inpatient and Outpatient Market Basket Productivity Adjustments”
In addition to the productivity adjustment, the ACA also imposed additional ad hoc annual cuts to the statutory market basket formula for hospitals.
This cut is applied to both the inpatient and outpatient updates.

50. Sensitivity analysis using an alternative scenario
Illustrative Medicare projections under a hypothetical alternative that assumes that,
Starting in 2020 the productivity adjustments gradually phase down to 0.4 percent, and starting in 2024, physician payments transition from a payment update of 0.0 percent to an increase of 2.3 percent.
In addition, the illustration also assumes that requirements for the Independent Payment Advisory Board would not be implemented
Sensitivity analysis using an alternative scenario

52. Big Questions about Consolidation in the Health Sector
Will increasing market consolidation lead to higher health care spending as larger systems with greater market power
extract higher prices from private payers
while at the same time inhibiting innovation and cost reduction?
Will larger, integrated systems be able to provide substantially better care and achieve greater efficiencies? Mergers
create high-volume institutions with better outcomes
achieve more “integrated” care
are better financially equipped to make substantial investments needed to improve quality of care
Can government-imposed efficiency and cost control regulation “bend” the cost curve down or is the good swamped by inefficiencies and unintended consequences?

53. Herfindahl Hirschman Index of industry: Sum of squared market shares:
4 firms: 25%, 25%, 25%, 25% => 252*4 = HHI = 2,500
82%, 6%, 6%, 6% => *3= HHI = 6,832

54. Herfindahl Hirschman Index of industry: Sum of squared market shares:
4 firms: 25%, 25%, 25%, 25% => 252*4 = HHI = 2,500
82%, 6%, 6%, 6% => *3= HHI = 6,832

58. Provider bargaining power and price negotiations with private payers
Prices paid to hospitals by private insurers vary dramatically within hospital markets. Evidence points to hospital bargaining leverage as a key driver of differences between expensive and inexpensive hospital systems in the same hospital market.
“Must-have” providers (providers that health plans must include in their networks to attract employers and consumers) use their clout to raise prices. Others are “price takers” and have no choice but to accept lower rates.
Note: Each column is a hospital.

59. A handshake that made healthcare history
Partners received 31% of the money Massachusetts commercial payers spent on acute care hospital services in 2012.

60. Partners cuts deal with Blue Cross to jack up insurance payments
In May 2000, BCBS of MA agrees to give Partners doctors and hospitals a huge increase in insurance payments.
In return, Partners protects Blue Cross from competition by agreeing to refrain from allowing other insurers to pay less.
Partners promised to push for the same or bigger payment increases for everything from X-rays to brain surgery from other health plans.
Blue Cross called it a "market covenant."

61. Partners uses clout to impose higher insurance payments on other insurers
Then pressures Tufts and Harvard Pilgrim to give Partners rate increases as large or larger than Blue Cross

62. Partners uses clout to impose higher insurance payments on other insurers
Partners announces it will no longer accept Tufts insurance.
Launches marketing campaign.
Signs at Partners reception desks notify Tufts members that their insurance would soon be denied. Website tells them how to switch insurers.
Within days, major employers & thousands of Tufts members threaten to cancel their policies.
Tufts surrenders in a week.

63. Composite RP percentile for each hospital is equal to the simple average of all payers’ Blended RP
percentiles for that hospital. “Blended” denotes that inpatient and outpatient RP results are combined. “
Partners was the only system for which all hospitals had composite RP percentiles above
the network median.

64. The challenged provisions are known as most favored nation (MFN) clauses.
MFN provisions refer to contractual clauses between insurance plans (buyers) and healthcare providers (sellers) that essentially guarantee that no other plan can obtain a better rate than the plan wielding the MFN.
The department said that the MFNs require a hospital either to charge BCBSM no more than it charges BCBSM's competitors, or to charge the competitors a specified percentage more than it charges BCBSM, in some cases between 30 and 40 percent.

65. U. S. hospitals are stepping up their bid to stop Anthem Inc
U.S. hospitals are stepping up their bid to stop Anthem Inc.’s takeover of rival health insurer Cigna Corp., saying the deal will increase the dominance of Blue Cross Blue Shield plans and potentially raise premiums for consumers.
Enhanced bargaining power of the Blue Cross plans will undermine competition and should compel the Justice Department to stop the deal, the American Hospital Association wrote in a letter to the department’s antitrust chief.
“The acquisition threatens to both reinforce existing barriers to entry and raise new ones, further entrench dominant Blue plans, and exacerbate conditions conducive to abuse of market or monopoly power,” according to the letter.

67. Competition and entry to promote efficiency and innovation
Competition from new entrants can put old companies out of business or force unwelcome and disruptive changes. Cost-control, efficiency, and innovation processes can be wrenching and painful.
Walmart displaced Sears, and Amazon may displace Wal-Mart.
Typewriter companies didn’t invent the word processor; word-processing companies didn’t invent the PC.
The post office didn’t invent FedEx or .
Kodak is out of business, hobbling its digital cameras to protect a dying film business.
Toyota brought cheaper and better cars, not competition between Ford, GM, and Chrysler.
When the older businesses survive, it is pressure from new entrants that forces them to adapt.
Can competition transform healthcare or is health fundamentally different from other industries?

68. Entry, Certificate of Need and CTCA
State-based certificate-of-need (CON) laws, present in 36 states, require entrepreneurs to provide extensive justification before building a new hospital or nursing home, thereby shielding incumbents from innovative competitors.

69. Entry, Certificate of Need and CTCA
Cancer Treatment Centers of America is a private, for-profit operator of cancer treatment hospitals and outpatient clinics which provide both conventional and alternative medical treatments.

70. Entry, Certificate of Need and CTCA
John Cochrane:

71. Entry, Certificate of Need and CTCA

72. Politics and Health Care
Since 2010 operating losses at California’s Daughters of Charity Health System have tripled to $146 million.
High pay scales, inflexible work rules and rich pension benefits have swelled labor costs to 74% of revenues compared to the nationwide average of 58% at nonprofit systems.
The hospitals have also been stung by the state’s stingy Medicaid reimbursement rates, which are about half as much as Medicare and third lowest in the country.
Daughters is losing about $10 million each month and will soon run out of cash
Daughters sought to sell its six insolvent hospitals in California to Prime Healthcare, a company in the business of rescuing financially distressed hospitals
Prime offered $843 million, a commitment to keep all the hospitals open a minimum of five years, fully fund the pensions of 17,000 current and former employees, maintain or increase charity care and invest over $150 million in capital improvements.
Of six bidders, only Prime agreed to assume the $300 million liability for worker pensions. 

73. State law requires the AG to approve nonprofit hospital acquisitions
Service Employees International Union (SEIU) opposed the deal owing to the Prime’s rejection of a neutrality agreement which would facilitate unionization at all of its hospitals. Only four of Prime’s 15 hospitals in California are unionized. Since 2009 the SEIU has run a public campaign against Prime, leveling accusations of Medicare fraud and unchecked sepsis.
The California AG imposed significant terms on Prime to allow the deal
In March 2015, Prime Healthcare Services announced it has decided to pass on its $843 million deal to buy the Daughters of Charity Health System.

74. State law requires the AG to approve nonprofit hospital acquisitions
Some patients expressed concern about the Los Altos Hills based hospital system
changing hands from a Catholic run organization to a New York City based group of investors.
In public meetings around the state, Creem (New CEO) had said a central part of the firm's money making strategy will be luring patients with private insurance which pays more than government funded MediCal or Medicare rates from other hospitals.