Health care economics and why it matters
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Health Care Economics and Why it Matters. Paying for Medical Care. Pre-WW II Mostly Private Pay Some Employer Provided - Kaiser The Blues WW II Price Controls Health Insurance As Benefit Post WW II Private Insurance The Blues Medicare/Medicaid. The Blues. Blue Cross

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Paying for Medical Care

  • Pre-WW II

    • Mostly Private Pay

    • Some Employer Provided - Kaiser

    • The Blues

  • WW II

    • Price Controls

    • Health Insurance As Benefit

  • Post WW II

    • Private Insurance

    • The Blues

    • Medicare/Medicaid

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The Blues

  • Blue Cross

    • Hospital insurance

  • Blue Shield

    • Physician insurance

  • Historically controlled by the providers

    • Paid what was charged

    • Subsidized the rural areas and care of the poor

    • Subsidized over-bedding and over treatment

  • Nobody cared until the 1970s

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Social Security Income and Disability

  • 1930s

    • Lifted the elderly out of poverty

    • Retirement age was older than life expectancy

    • Why does this matter a lot?

  • 1956 Amendments - Provided disability insurance

    • Big and valuable program and pays for a lot of medical care - 7.5M people

    • Gamed a lot and manipulated both ways by Congress

    • (reference)

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  • Post-WWII

  • Funded construction of community hospitals

  • Had community service requirements, but those have all expired

  • Created the US emphasis on hospital based care

  • Spent from the 1970s to the 1990s reducing hospital beds to control costs

  • Excess beds or Surge Capacity?

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The Great Society- 1964Inventing the Modern Elderly

  • Medicare

    • Old People

    • Certain disabled people

  • Medicaid

    • Poor People

    • Nursing Homes - old/disabled

    • About 40% of federal medical dollars

  • Politics

    • Fought by the AMA

    • Made Docs Rich

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The Federal Role

  • Feds Pay About 45% of Health Care

    • Medicare, Medicaid, TriCare, VA System

    • Other Plans Follow the Feds

  • Usual and Customary Charges for Docs

    • Based on the Community

    • Adjusted for the Docs Previous Charges

    • Complex

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What do We Spend?

  • Total health care spending

  • Medicare 2008 Factsheet

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Implications of Spending for Torts

  • Hospitals

    • Single biggest component

    • In the tort world, remember Willie Sutton

  • Outpatient Surgery Centers, Specialty Hospitals, and Imaging Centers

    • Increasingly capturing revenue from hospitals

    • Doc run - lots of conflicts of interest

    • Good future in med mal

  • Pharm and Medical Devices

    • Growing share of the market

    • Best tort target

  • Physicians

    • Specialists who do procedures

    • Primary care

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Perverse Incentives

  • The #1 corrupting incentive in health care is that insurers pay for doing stuff and giving drugs, not for thinking and talking to patients.

    • Only thing new is the amount of money at stake

  • Hospitals

    • Longer stays, more intense treatment, attempts to keep the dead warm

    • For many years, hospitals did not even know what things cost, they just charged what they needed to make money

    • Nonprofit and forprofit are about the same

  • Drug and Device Companies

    • Bribe docs to over prescribe and use inappropriate but expensive drugs and devices

  • Docs

    • Unnecessary procedures/Feel good drugs/Get a piece of the action on tests

    • Federal law prevents kickbacks and fraud - not a tort, but interesting.

  • All of these depend on the myth that more care is good care

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Changing the Game for HospitalsDiagnosis Related Groups - DRGs - 1983

  • Watershed in Health Care Reimbursement

    • Prospective Payment (Capitation)

    • Based on Admitting Diagnosis

    • Fixed Payment

    • Some Adjustments

  • Encouraged health insurers to also manage physician care

  • Only apply to Medicare, but influence other insurance

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Making Money Under DRGs

  • Fewer Tests and Procedures

    • Complete Reversal of Prior Reimbursement

    • No Bump for ICU

  • Reduce Length of Stay

    • Dropped About 20% at Once, continued to drop

    • Ideal Is Out the Door, Dead or Alive

    • Patients Discharged Much Sicker

  • Which Was Right, Then or Now?

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Controlling Docs - Laws Enabling Managed Care

  • Federal HMO Act in the 1970s

    • Preempted State Laws Banning Prepaid Care


    • Passed to allow labor unions to negotiate national health plans with big employers

    • Preempts state regulation of certain self-insured health plans

    • Gave self-insured plans an edge and drove most employers to them

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Managed Care Organizations - MCOs

  • Insurance Plans That Control Patient Care

  • Includes the Old Alphabet Soup

    • HMOs

    • PPOs

    • IPAs

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Two Major Variables

  • Employer or Contractor

    • Do the docs work for the plan or a captive group?

    • Do the docs contract with many plans, treating patients based on different plan benefits?

  • Open or Closed

    • Do the docs treat only patients from a single plan or a mix of plans?

  • Why do these matter?

    • Leverage on the doc's decisions

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Direct Controls on Costs by the Plan

  • Pay Less for Services

    • Use Market Power to Bargain

    • Control Access Points

    • Limit Hospital Stays

    • Limit Tests, Procedures, and Referrals

  • Direct Control of Access

    • Pre-approval

    • Tell the Docs What to Do

    • Most Honest

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Indirect Controls

  • Capitation

    • CRF--Consultation and Referral Funds

    • Withhold and Incentive Pools

    • Stop-loss and Reinsurance

    • Total Capitation

  • Economic Credentialing

  • Dumb Down Services

  • Free Ride on Other Plans or the Government

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Current State of Doc Control by Insurers

  • Managed care backed off direct control

  • More emphasis on just paying less

  • Providers and businesses that do procedures, run labs, or sell drugs and devices use their money as political power to protect their income

    • #1 cost problem

    • Rich docs are not automatically better docs

  • Primary care has seen its pay cut in real terms over the past 20 years

  • Cannot even attract US trained docs to primary care residencies in many places

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U.S. Has A Lower Life Expectancy than Most Other Industrialized Countries

  • Taken as a major criticism of the US system

  • Is life expectancy really the right measure?

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Life Expectancy Is Not Health Industrialized Countries

  • Bias

    • Weighted Toward the Young

    • One Baby Is Worth Several Grannies

  • Only Life Counts

    • Discounts Quality of Life

    • Nursing Home Is As Good As the Ski Slopes

    • Masks Aging Population

    • Masks Improved Health

  • A Good Measure for Developing Countries

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What Complicates Health in the US? Industrialized Countries

  • We Have 3rd World Public Health

    • Ineffective Prenatal Care

    • Poor Immunization Practices

    • Limited Access to preventive and routine care

  • Teen Pregnancy

    • Prematurity

    • Poor Parenting

  • Developed World Leader in AIDS

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Non-medical Issues Industrialized Countries

  • The Problem of the Poor

    • Poor Education

    • Poor Health Habits

    • Cannot Afford Prevention

  • Geography

    • Too Many Isolated Areas

    • Expensive to Deliver Care

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How has the Health Care Umbrella been Expanded? Industrialized Countries

  • Sin to Sickness

    • Alcoholism

    • Drug Abuse

  • Miscatagorization

    • Nursing Homes - housing?

    • Vanity Surgery - life style?

  • Should Compare Total Social Welfare Budget with Europe

    • General social welfare spending is much higher in Europe

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The Core Problem Industrialized Countries

  • Public health and primary care does not work well

    • Chronic diseases can be mitigated, but not cured or prevented

    • Shifts care to expensive technology and drugs

  • Emphasis on drugs also makes us a drug-ridden society

    • DARE as a joke

    • How do tell a kid that Adderal is good and meth is bad?

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Impact of Governmental and Private Plan Economics and Special Interests on Care

  • High tech care has the strongest interest groups

    • Providers and suppliers have a lot of money

    • Patient advocacy groups are easy to capture

    • Captures every more of the budget

  • Primary care, prevention, and public health

    • Not sexy

    • Big savings are low tech, long term

    • Not a good news story

    • Providers do not have the money to lobby

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Patient Directed Care Example Special Interests on Care

  • Patients will spend their own money and will thus make better decisions

    • What is their knowledge base?

    • Can you really learn what you need on the WWW?

  • How will this play out for preventive care?

  • What is the incentive for providers?

    • Feel good drugs?

    • Antibiotics?

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Why it will Get Worse: Special Interests on CareSecond Order Demographics

  • People live longer because of medical care and public health

    • More old people

    • More people with chronic illness do not die

    • Old people need more

    • Total cost goes up

  • Health is much more expensive than death

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The Real Third Rail: Retirement Age Special Interests on Care

  • What are current implications of a system designed for people to retire at 65 when the average life expectancy was about 60?

  • What should retirement age be?

  • How does increasing the retirement age help pay for health care?

  • How would this change society?

  • What about the

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Health Care Reform Special Interests on Care

  • Who will lose?

  • Who will win?

  • How will we pay for expanding access?