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Healthcare Overview

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  1. Healthcare Overview Association of Healthcare Internal Auditors John P. McGuire May 7, 2008

  2. TOPICS • Healthcare Economics • Payment Systems • Profitability Assessment • Business Strategies • Performance Measures • Future Opportunities

  3. Chart 1.4: National Health Expenditures as a Percentage of Gross Domestic Product, 1980 – 2005(1) Source: Centers for Medicare & Medicaid Services, Office of the Actuary. Data released January 8, 2007. (1) CMS completed a benchmark revision in 2006, introducing changes in methods, definitions and source data that are applied to the entire time series (back to 1960). For more information on this revision, see http://www.cms.hhs.gov/NationalHealthExpendData/downloads/benchmark.pdf.

  4. =37.4%

  5. Chart 1.5: National Expenditures for Health Services and Supplies(1) by Category, 1980 and 2005(2) $234.0B $1,860.9B Source: Centers for Medicare & Medicaid Services, Office of the Actuary. Data released January 8, 2007. (1) Excludes medical research and medical facilities construction. (2) CMS completed a benchmark revision in 2006, introducing changes in methods, definitions and source data that are applied to the entire time series (back to 1960). For more information on this revision, see http://www.cms.hhs.gov/NationalHealthExpendData/downloads/benchmark.pdf. (3) “Other” includes net cost of insurance and administration, government public health activities, and other personal health care. (4) “Other professional” includes dental and other non-physician professional services.

  6. Four Myths of Health Care Costs 1. Healthcare costs are driven by greed. 2. Healthcare costs are driven by waste. 3. We can’t keep spending more on our health. • Other countries get the same for less. Source: Ira Ellman - Arizona State University

  7. Another viewpoint on thecause of health care costs • The increase in morbidity rates is due to good medicine. • The expanding concept of health. • The seduction of technology and the deception of marketplace models. • The American Character and appetite. Source: Willard Gaylin, M.D.

  8. Chart 4.2: Aggregate Total Hospital Margins, (1) Operating Margins, (2) and Patient Margins,(3) 1991 – 2005 Source: Avalere Health analysis of American Hospital Association Annual Survey data, 2005, for community hospitals. (1) Total Hospital Margin is calculated as the difference between total net revenue and total expenses divided by total net revenue. (2) Operating Margin is calculated as the difference between operating revenue and total expenses divided by operating revenue. (3) Patient Margin is calculated as the difference between net patient revenue and total expenses divided by net patient revenue.

  9. Chart 4.6: Aggregate Hospital Payment-to-Cost Ratios for Private Payers, Medicare, and Medicaid, 1981 – 2005 Source: Avalere Health analysis of American Hospital Association Annual Survey data, 2005, for community hospitals. (1) Includes Medicaid Disproportionate Share payments.

  10. Medicaid Payment Remains Under Pressure • Medicaid Affects Every Hospital • Reduced benefits/service level caps • Provider payment cuts • Spillover to neighboring hospitals “If something cannot go on forever, it will stop.” Herb Stein, economist Missouri: 90,000 cut Tennessee: 300,000 cut

  11. Employment Drives the Prevalence and Richness of Health Coverage Cause and Effect: US Unemployment Rate vs. the Percentage of the Non-Elderly Population with Employment-Based Coverage Employment-Based Coverage Non-Elderly With Employment-Based Coverage Unemployment Rate Unemployment Rate Secondary Impact: Less competitive labor markets enable firms to shift more health care costs to employees—in the form of premium-sharing, deductibles, copays and coinsurance. Source: Bureau of Labor Statistics

  12. The Long-Term Trend of Consumers Paying Less Is Reversing Consumer Out-of-Pocket Share of Personal Health Care Spending US Market, 1930-2010 Medicare and Medicaid CDHC reverses decline in consumer share of costs Sources: Milliman & Robertson, Bureau of Labor Statistics, Sg2 forecast

  13. Adoption of Consumer-Driven Plans Continues to Accelerate Enrollment in Consumer-Driven Health Plans 2001–2006 I fully expect to pay some share of my health care somewhere down the road. Would I like it? No. Would I understand it? Yes. GM auto worker Sources: Inside Consumer-Directed Health Care; Wall Street Journal; Sg2 Analysis, 2005.

  14. The Access Project http://www.accessproject.org/downloads/Hospital_Finance.pdf

  15. Contrary to Popular Belief, Health Care Is Not Recession-Proof People will always get sick. They can, and do, defer care. Employers do, and increasingly their employees do as well. People don’t pay for health care. Yes, But Health care always grows. Remember the 1990s? The government will always be there. Not always, and Medicare and Medicaid usually pay less. “We feel we are aiding society in this regard, while availing ourselves of the financial opportunities afforded by the one industry, health care, that has historically been recession-proof.” —CEO’s Annual Report Letter

  16. The Health Care Industry Moves in Cycles . . . Like Everything Else Yearly Growth Rate 20% Phase IBack to the Future Phase IIThe Party Doesn't Last Phase IIIGrowth Returns 18% 16% 14% Consolidation and Retrenchment 12% Projected Average Growth in Total Health Care Expenditures 10% 8% 6% 4% 2% 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Sources: U.S. Department of Health and Human Services

  17. The Next 10 Years: A Mostly Flat Inpatient Market Med/Surg Inpatient Discharges*US Market, 2005–2015 16% Population-Based Forecast 10% Sg2 Forecast *Excludes neonate, normal newborns, obstetrics and psychiatry. Sources: Impact of Change v4.0; NHDS; Sg2 Analysis, 2005.

  18. Key Strategic Challenge: Finding Profitable Growth in a Flat Market Technology Leadership Geographic Expansion ? Service Portfolio Expansion Efficiency Breakthroughs Service/Quality Breakthroughs

  19. IP Growth Areas Include Interventional Cardiology, GI and General Surgery Service Line Landscape*† Relationship Between Percent Change in Days and Discharges US Market, 2005–2015 % Change in Days % Change in Discharge Volumes *Bubble size represents DRG volumes in 2005. †Excludes neonates, normal newborns, obstetrics and psychiatry. Source: Impact of Change v4.0; NHDS; Sg2 Analysis, 2005.

  20. Ambulatory Services Are the Growth Market in Health Care Inpatient and Outpatient Volume Growth for Cancer and Orthopedic Service LinesUS Market, 2004–2014 Factors Driving Growth in Outpatient Services • Technology • Patient preference • Physician preference • Higher case volume • Control over care process • Revenue opportunity • Proliferation of outpatient care options/players • Cost reduction imperative Inpatient Outpatient

  21. Chart 4.3: Distribution of Outpatient vs. Inpatient Revenues, 1981 – 2005 Source: Avalere Health analysis of American Hospital Association Annual Survey data, 2005, for community hospitals.

  22. Who Is Making Money in Health Care? Profitability Across Health Industry Subsectors, 2002-2004 Medical Device Pharmaceutical & Biotechnology Health Plans Hospitals Notes: Profitability measured as operating income of a select group of publicly-traded companies in each sector. Decline for hospitals in 2004 is almost entirely driven by the negative performance of Tenet.

  23. A Big Construction Pipeline Is Still Working Its Way Through the System Acute Care Bed Construction at Different Stages U.S. Market, 1993 - 2004 Designed 1998: Turning point for new projects initiated Broke Ground Completed 2004: Turning point for new projects completed

  24. There Is More Good Technology than Any Institution Can Buy 64-Slice CT = $1.5 – 2 million BrainLab = $8 million ICDs = $30,000 each DaVinci robot = $1.5 million