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Chapter 6 Financing Health Care and Economic Issues. History of Health Care Financing. Underlying themes driving health care financing in the United States for the past two decades Physicians had the dominant role in health care decision-making

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Chapter 6Financing Health Care and Economic Issues


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History of Health Care Financing

  • Underlying themes driving health care financing in the United States for the past two decades

    • Physicians had the dominant role in health care decision-making

      • Physicians controlled all access to health care services

      • Tests or procedures were provided if the physician determined that any marginal benefit might be obtained

    • Objective was to provide the “best” possible care to everyone

    • The sophistication of medical technology rapidly increased


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History of Health Care Financing

  • Fee-for-service payment method and economic incentives contributed to increased costs

    • The more tests or procedures performed the greater the physician’s earnings because earnings were tied to procedures

    • Economic incentives to provide as much care as possible

    • Patients were insulated from costs because insurance was paying the bill


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History of Health Care Financing

  • Lack of cost-consciousness contributed to increased costs

    • Patients were not aware of costs

    • Providers had little incentive to be concerned about costs

    • Providers received more income for using more services

    • Providers had no financial risk for using additional resources


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History of Health Care Financing

  • Medicare expenditures increased rapidly

    • The program was implemented in 1965 with a fee-for-service payment mechanism

    • Rapid growth of expenditures became a major factor in the federal budget deficit

  • Aging population retired no longer contributes to Social Security Fund


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History of Health Care Financing

  • Health care financing revolution

    • Initiated in 1983 when Medicare moved to a prospective payment system based on diagnosis-related groups (DRG)

    • Medicare limited its total payment to the hospital to an amount preestablished for the patient’s specific DRG

    • Shift was critical for hospitals since Medicare was the largest single payer of hospital charges (30%)


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Coping measures Employed to Beat the New System

  • Materials and drugs mark up

  • Difference in payment for out patient procedures vs in patient procedures

  • EX: PCI on a 23:59 hold vs admission for 24 hours


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History of Medical Care Financing

  • Once the reimbursement revolution began, private insurance companies initiated similar reimbursement arrangements

  • Medicare extended the financing revolution to physician reimbursement in the early 1990s and initiated the resource based relative value scale (RBRVS)

  • RBRVS brought physician reimbursement more in line with skills required and actual time spent on procedures


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History of Medical Care Financing

  • Managed care

    • Encompasses several different approaches

      • Health maintenance organizations (HMOs)

      • Preferred provider organizations (PPOs)

      • The insurance company, a peer review organization, or another review mechanism evaluates the patient’s medical options and brings cost consciousness to bear on medical decision making

      • Has slowed the rate of growth of health care costs


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History of Medical Care Financing

  • Rapid expansion of managed care is a response to numerous factors

    • Cost inflation

    • Overuse of medical care and resources

    • Increased number of uninsured people

    • Effects of employers’ health costs on business profits

    • International competitiveness


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History of Medical Care Financing

  • Inflation and cost containment

    • Health care costs increased more rapidly than prices of most other goods and services from the mid-1970s through the 1980s

    • Measures taken in recent years by insurers, payers, providers, and consumers have helped to slow health care inflation


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History of Health Care Financing

  • The largest share of health expenditure is for hospital-based care, which has achieved reduced inflation

  • DRGs led to decreases in hospital admission rates and patients’ average length of stay; patients are being discharged from hospitals “quicker and sicker”; use of home health and primary care clinics have increased

  • Hospitals are using cost-cutting techniques such as decreasing inventories, joining purchasing groups, and using physician review


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History of Health Care Financing

  • Drug companies have been forced to limit price hikes; generic products are often prescribed

  • New cost containment and utilization control strategies under managed care as well as cost sharing by patients have helped slow inflation


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HCFA

  • The Health Care Financing Administration (HCFA) was created as a principal operating component of the Department by the Secretary on March 8, 1977, to combine under one administration the oversight of the Medicare program, the Federal portion of the Medicaid program, and related quality assurance activities. Today, HCFA serves 67 million people, or one in four elderly, disabled, and poor Americans through Medicare and Medicaid. In fiscal year 1993, HCFA will spend an estimated $230 billion to provide health care services.


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CPT - Current Procedure Technology

  • CPT Codes describe medical or psychiatric procedures performed by physicians and other health providers. The codes were developed by the Health Care Financing Administration (HCFA) to assist in the assignment of reimbursement amounts to providers by Medicare carriers. A growing number of managed care and other insurance companies, however, base their reimbursements on the values established by HCFA. Since the early 1970s, HCFA has asked the American Medical Association (AMA) to work with physicians of every specialty to determine appropriate definitions for the codes and to try to determine accurate reimbursement amounts for each code. Two committees within AMA work on these issues: the CPT Committee, which updates the definitions of the codes, and the RUC (Relative Value Update Committee), which recommends reimbursement values to HCFA based on data collected by medical societies on the going rate of services described in the codes.


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History of Health Care Financing

  • Access Issues

    • Predominant health care issue for the 1990s

    • Lack of access to health care is primarily lack of health insurance

    • In 2002 fifteen percent of people in United States were uninsured - 43 million people

    • Underinsured and uninsured generate uncompensated care and “bad debt” for health care providers, who must then increase charges to paying customers (households and public and private insurers) in a process known as “cost shifting”


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U.S. VERSUS U.K.

Private Healthcare VERSUS Universal Healthcare

Maslow’s hierarchy of motivation.

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May 10, 2006

  • Last week, in his New York Times column , Paul Krugman wrote about a study from the Journal of the American Medical Association , and the study is fascinating enough that it’s worth a second look. It was conducted by a group of epidemiologists at University College London (my parent’s alma mater!). The point was to compare the health of the United States and the United Kingdom. It’s an interesting question for a number of reasons, but principally because the United States spends $5274 per person, per year, on health care and the United Kingdom spends $2164, or substantially less than half as much. The question is—what do we get, in terms of health, that for extra $3100 a year?


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May 10, 2006

  • Comparisons between countries are pretty tricky. So the study takes a number of precautions. Obviously the United States has a much larger percentage of immigrants, particularly Latino, and black population. So the comparison is limited to non-Hispanic whites in both countries. Health also differs, dramatically, by socio-economic status, so that everyone in the study was broken up into one of three groups by income and education. It was also limited to men and women between the ages of 55-64, and the age distribution of the two countries was identical.

  • So what do they find?


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May 10, 2006

  • The first conclusion is that Americans are really, really sick compared to the British. In every socio-economic group, for instance, the prevalence of diabetes is roughly double in the United States than it is in the United Kingdom. Rates of hypertension, heart disease, heart attacks, stroke, lung disease and cancer are also all higher in the United States. And not just a little big higher. Much higher. So, for example, 2.3 percent of the English have had a stroke, versus 3.8 percent of the Americans.

  • Is that because Americans have unhealthier lifestyles? Not really. Levels of smoking, in the two countries, are pretty similar. Americans are much more likely to be obese (31.3 versus 23 percent). But then 30 percent of the British were heavy drinkers, versus 14.4 percent of Americans. (One of the curious facts in the study:  in both the United States and the United Kingdom, the more money you make and the more education you have, the more you drink. There are roughly twice as many heavy drinkers in the best educated English cohort as there are in the least educated English cohort. So much for class assumptions about alcohol.) The study’s author did a statistical exercise, where they assumed that the British group had exactly the same lifestyle risk factors as their American counterparts. The result? Nothing much changes. Americans were still far sicker than the British. 


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May 10, 2006

  • Krugman argues that this is evidence of how much more stressful living in America is than living in England. I think that's absolutely right. I would simply add that it is one more nail in the coffin of the notion that good health is something that can be purchased through fancy, high-tech drugs and doctors and hospitals,.I know the idea that health care is just another consumer good is pretty popular at the moment. But its very hard to read the JAMA study, see what our $5274 actually buys us--and still believe in that notion. Our health is in reality a function of the broader society in which we live--the pressures and conditions and environments in which we find ourselves. The next time we have a debate about, say, how much to tax the rich, or how to structure old age pensions, it would be nice if someone in Washington had the courage to make this point.


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History of Health Care Financing

  • The poor are more likely to lack a usual source of care, less likely to use preventive services, and more likely to be hospitalized for avoidable conditions than those who are not poor

  • Uncompensated care and cost-shifting are primary reasons some groups advocate for national health insurance

  • Other health barriers to health care access

    • Location or geographic problems of access

    • Long waiting times to obtain health care resulting in lost wages if patients have to miss work

    • Scarce resources in obtaining organs for transplantation


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Allocation of Health Care Resources

  • Health Resources

    • “Labor” or inputs devoted to producing health care

      • Nurses, physicians, pharmacists, technicians, and administrators

      • Education and training for “labor”

    • “Capital” including all medical facilities and equipment available

    • “Land” including the actual land area for hospitals and other facilities

    • “Entrepreneurship” encompasses skills and risk-taking that business-persons bring to health care organizations


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Allocation of Health Care Resources

  • Resource allocation questions

    • What combination of medical goods and other goods and services in the United States do we want to produce?

    • What type of health and medical care do we want to produce?

      • High-tech institutional-based mix of health services emphasizing crisis oriented medical care?

      • Prevention-oriented system emphasizing primary care and wellness?

    • Who should receive health care goods and services?

    • Should all citizens have financial access to health care?

    • National health expenditures predicted to double by 2010


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Economic Approaches to Allocating Health Care

  • Regulated market system

    • Market system implies private ownership of resources and private decision making by consumers about their purchases and by businesses about producing and selling

    • U.S. health care system is a regulated market system because almost every area is regulated

    • Examples of regulation

      • Requirements of minimum nurse staffing of hospitals, particularly in ICU, CCU, or maternity

      • Laws regarding disposal of medical waste products

      • Regulations affecting the conduct of medical labs


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Economic Approaches to Allocating Health Care

  • Competitive Market System

    • Decisions in a competitive market system are generally based on the prices of goods and services

    • U.S. health care system is not really competitive for several reasons

      • Consumers cannot be informed about what health care to purchase without a diagnosis from a physician

      • Difficult to get information about prices of services

      • Physicians may be in charge of decision making about what services the patient needs

      • Physician's reimbursement incentives may encourage over-or underutilization of services


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Economic Approaches to Allocating Health Care

  • Consumers often pay less than full price because the health insurance may pay part or all of the costs

  • With health insurance the consumer may perceive health care as cheaper than it is and is motivated to over consume

  • The noncompetitive U.S. health care system is an important determinant in the increase in managed care

  • Job Growth and the Health Care Industry


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    Sources of Health Care Financing

    • Private insurance

      • Pays two-thirds of privately financed health care

      • Increasingly following Medicare’s lead in changing payment mechanisms to include HMOs and PPOs

        • HMOs

          • May have capitation payments or fee-for-service payments to providers; reduce costs by restraining use

        • PPOs

          • Based on contractual arrangements between the insurer and provider; insurer gives lower prices and the insurer motivates insurees to use that facility or physician group


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    Sources of Health Care Financing

    • Tax subsidies of private payments

      • Government subsidizes private sources of health expenditures if they represent tax deductions and nontaxible income

      • Cities subsidize health care real estate through property tax exemptions for nonprofit and public hospitals


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    Sources of Health Care Financing

    • Public insurance

      • Government is the biggest influence in the health insurance market generating 50% of hospital revenues and 25% of physician incomes

      • Medicare covers approximately 13 % of the U.S. population

      • Medicaid covers approximately 10% of the population

    • Impacts of payment modes

      • Increased the efficiency of the delivery of care

      • Influenced provider behavior, emphasizing the importance of economic incentives to shift toward cost-effective methods of care


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    Implications for Nursing: Managing Cost Effective, High Quality Care

    • Efficiency and effectiveness of care

      • Nurses can impact care delivery through the nursing process, case management, utilization management, and education

      • Nurses will be most successful when they can demonstrate care with measurable, effective outcomes

      • Coordinated care

      • Case management

      • Disease management

      • Outcome management


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    Implications for Nursing: Managing Cost Effective, High Quality Care

    • Nurses’ role in managing care

      • Support and provide cost-effective care for wellness, acute care, and chronic illness

      • Provide health education to improve health, practice prevention, and manage chronic conditions

      • Manage health care services for optimal resource management with high-quality outcomes at reasonable costs


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    Implications for Nursing: Managing Cost Effective, High Quality Care

    • Trends affecting the future of health care practitioners

      • Efficiency and effectiveness through coordinated care

      • Population diversity and aging

      • Expansion of technology

      • Consumer empowerment


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    Implications for Nursing: Managing Cost Effective, High Quality Care

    • Population diversity and aging

      • Growing elderly population translates to an increase of health care expenditures consumed by older adults as chronic illnesses increase

      • Nurses can implement disease management programs and participate in care management in long-term care settings

      • Cultural diversity will bring new cultural practices and disease patterns with economic and care implications; new labor force to health care


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    Implications for Nursing: Managing Cost Effective, High Quality Care

    • Expansion of technology

      • Technology is under examination for cost efficiency versus outcome delivery

      • Nurses will play a key role in educating patients and families about the cost-to-benefit ratio and will assist in selecting alternatives

      • Technology of the Internet offers promise for innovative programs

      • Nurses can combine clinical skills with information technology skills to meet a critical need for health information and data management


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    Implications for Nursing: Managing Cost Effective, High Quality Care

    • Consumer empowerment

      • Customers or patients as health care consumers are demanding quality services at affordable rates

      • Nurses must understand and provide customer-focused care

      • New relationships with consumers are developing that emphasize cost sharing based on individual health practices


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    Implications for Nursing: Managing Cost Effective, High Quality Care

    • Legislation is in place to protect individuals enrolled in managed care plans; access, quality, cost

    • Nurses can take the lead in demonstrating the value of wellness and teaching health consciousness


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    Informed Consumer-Caveat Emptor

    • The premise is that medical spending will slow only if the demand for health services becomes more price elastic—that is, if consumers become price sensitive.

    • Two Options are now popular

      • Employers will contribute a defined amount of money for health insurance benefits and permit their employees to select the health plan (and benefits and cost-sharing) they want from a set of choices. This assumes that meaningful information about the quality of the alternative health plans can be developed and provided to employees.

      • People will choose a high-deductible insurance plan and a health savings account (HSA)—as now permitted by the Medicare Modernization Act of 2003—and then decide for themselves when to use the HSA funds. This asks consumers to take more responsibility for choices related to their medical care.


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    Expecting Reduced Use of Some Medical Care

    • Requiring consumers to pay for all medical costs below a deductible surely will cause demand for some medical care services to decline. The most likely categories are visits to physicians, prescription drugs, diagnostic preventative visits, and some discretionary outpatient surgeries. So far, so good. However, when evidence indicates that certain diagnostic screening tests or preventative “well-person” visits are cost-effective, it is penny-wise and pound-foolish to maintain incentives for people to reduce their use of these services.

    • The big spenders are the 10% of the population responsible for 70% of total U.S. health care spending each year. Putting people at risk for expenses below high deductibles ranging from $2,000 to $5,000 is not likely to have any impact on the spending of people who are in the top 10% (or even 20%)—unless it affects their decisions to seek preventative care in the first place. Even then, however, a medical condition serious enough to push someone into the top 10% of health care spenders likely will drive a person to seek medical care eventually, regardless of the deductible.


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    The “Be-Careful-What-You-Wish-For” Scenario

    • Proponents of consumer-driven, high-deductible health plans believe that when people have to pay the costs of services up to a deductible, they will demand less care. But this assumption ignores some significant changes occurring in medicine today, as well as the ease with which people obtain information from web sites. One such change in medicine relates to diagnostic imaging. Spending on radiological testing is now growing as fast as spending for prescription drugs in many large health plans. Diagnostic imaging is a fabulous tool – not only does it increase physicians' ability to ferret out the cause of a problem, but it also enables many people to avoid invasive surgery. However, it is a double-edged sword. Often, the imaging turns up anomalies that are unrelated to the initial problem. This leads to repeated tests or sometimes surgery to determine the nature of the anomaly—and this is adding to health spending.


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    Disparities in Health Care Access and Outcomes Will Increase

    • Dot-com web sites and other web-based sources of information are generally seen as the primary sources of information for people to learn about options for treating conditions or diseases. This may make sense for the quarter of the population that is computer-savvy and already more likely to question physicians. The assumption that people will be able to use and understand web-based information is disingenuous, however, when it comes to the rest of the population. There are literally thousands of web sites related to medical issues. Many are highly technical and difficult to comprehend. How a highly educated consumer is to make a judgment about the benefits of even one recommended treatment option is not clear—and the situation is far worse for the half of the population with reading levels below seventh grade.


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    Slowdown in Health Care Spending Needed

    • Since the vast majority of health care spending goes for a tenth of us, a much greater gain may be found in refocusing on the health problems that cause such high expenditures. Being overweight or obese, for example, greatly increases a person's chances of developing diabetes, which in turn raises the odds for stroke, kidney problems, vision loss, and circulatory problems in general. All of these contribute to high spending. Community or statewide efforts to publicize the dangers and costs of such problems—akin to what has been done over the past 40 years to reduce smoking, and has been supported by insurers, employers, and governments—might do more, at less cost, to reduce avoidable medical spending


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    Participating Consumer

    • IT’S OUR HEALTHCARE!” CONSUMER CAMPAIGN LAUNCHED

    • The campaign will include online and person-to-person outreach to gather Californians’ healthcare stories and concerns, satellite-linked town halls across the state to learn about the issues and proposed solutions, house parties to bring neighbors, friends and

    • families together to discuss the problems with our healthcare system, and many opportunities for individual Californians to communicate to our elected leaders.The groups have come together around specific goals, and support and oppose ideas

    • and proposals that are currently a part of the health reform debate. Those goals are listed on the website.


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