Financing the U.S. Health Services System

1. Financing the U.S. Health Services System Chapter 7 Dr. Tracey Lynn Koehlmoos HSCI 678 Intro to US Healthcare System

2. Alibis • Nurse Revitalization Act of 2002 • ACHE: American College of Health Care Executives • HIPAA, HIPAA, HIPPA! • Health Insurance Portability and Accountability Act of 1996

3. 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

4. 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

5. 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.

6. Revenue • 55% Private funds • 45% Public funds

7. Revenue Sources

8. 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%

9. 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%

10. Non-Personal Health Services • Program administration: 6% • Research and Construction: 3% • Public Health: 3% • Percentages are part of total expenditures

11. Per Capita Expenditures

12. 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….

13. 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)

14. 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

15. 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

16. Technology • US—one of the most advanced systems in the world • Advances account for 20% increase in expenditures

17. 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

18. 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

19. 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

20. 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

21. 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

22. Expenditure Projections • Indicators point to continuing increase • By 2065 Health Expenditures will consume MORE THAN 25% of GDP

23. 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!

24. 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

25. 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)

26. 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

27. 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

28. 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

29. 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

30. Global Budgeting • Canadian healthcare system • Provinces provide a lump sum to hospitals. • Why are we even talking about this?

31. 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.)

32. Industry Expenditures • Business and industry spends an excessive amount on employee health benefits • 1990, 61.1% of pre-tax profit went to health expenditures!

33. 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.

34. 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