Health Care USA 1

Health Care USA 2

Chapter 7

Financing Health Care

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CHAPTER OBJECTIVES• Understand the scope and magnitude of U.S.

health care spending in relationship with other developed countries

• Understand how the U.S. health care payment system evolved & current trends

• Understand the related roles of government & the private sector in financing health care

• Understand efforts to link costs with quality

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PART 1

• National Health Care Expenditures– Influences on health care finances– Primary components of health care expenditures

• Private Health Insurance– Blue Cross/Blue Shield– Commercial Insurers– Managed Care

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Overview

•Multiple payment sources– Working Americans’ employer health insurance (Blue Cross/Blue Shield, managed care plans)– Public funds support Medicare (66 +), Medicaid for low-income individuals

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Influences on Health Care Financing

• Providers, employers (purchasers), consumers, politics

• Tensions- Responsibilities of– Government– Employers – Consumers – Providers– The Market

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Health Care Expenditures in Perspective

• 2008 expenditures= $ 2.33 trillion, 16% of GDP, $ 7,681/person; 1/6 of total economy

• Hospital care, physician services, prescription drugs: 3 top expenses

• Government sources finance 48% of total expenditures

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FIGURE 7-1 National Health Expenditures per Capita and Their Share of the Gross Domestic Product, 1960–2008.

Source: Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group.

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FIGURE 7-2 The Nation’s Health Care Dollar 2008:

Where It Went.

Source: Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group.

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FIGURE 7-3 The Nation’s Health Care Dollar 2008: Where It Came From

1Other Public includes programs such as workers’ compensation, public health activity, Department of Defense,Department of Veterans Affairs, Indian Health Service, State and local hospital subsidies and school health.2Other Private includes industrial in-plant, privately funded construction, and non-patient revenues, includingphilanthropy.3Out of pocket includes co-pays, deductibles, and treatments no covered by Private Health Insurance.Note: Numbers shown may not add to 100.0 because of rounding.

Source: Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group.

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Factors that Decreased Expenditure Growth

• Managed care utilization controls

• Hospital prospective payment

• Managed care physician fee restrictions

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U.S. Health Spending Compared with Other Developed Countries (2)

• 1970-2005: U.S. had largest increase in percent of GDP devoted to health care among 29 other countries– Lower life expectancy based on per capita income– Lower ranking on health status indicators– Spent > twice median spending of others per capita

on health care

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U.S. Health Spending Compared with Other Developed Countries (2)

– With 3rd highest level of public spending on health care, U.S. public insurance covered only 26.5% of population

– Lower U.S. utilization rates per capita (hospital stays and physician visits)

– Lower supply of expensive technology– Higher income & medical care prices…not

superior health care or better outcomes

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U.S. Health Care Waste

• 30-40% of spending yields no value, inefficiently producing valuable services

• CBO Director (2008): “future health care spending…the single most important factor determining the nation’s long-term fiscal condition– Evidence-based physician practice needed to

reduce variability

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Health Care Fraud & Abuse

• FBI 2009 estimates: $ 75-250 B

• U.S. Justice Department & HHS Inspector General investigate, convict and exclude providers– 2009 : Health Care Fraud Prevention and

Enforcement Action Team using new technology to identify and analyze suspected fraud

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Major Contributors to Increases in Health Expenditures

• New diagnostic & treatment technology• Growth in older population• Medical specialization• Uninsured, underinsured populations• Labor intensity• Reimbursement system incentives

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New Diagnostic & Treatment Technology

• Equipment, devices & pharmaceutical agents, requiring advanced personnel training & new personnel roles– Computed tomography scanning, Magnetic

resonance imaging, PET scanning– Pacemakers, implantable cardio-converters– Drugs and drug marketing to consumers

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Aging Population

• Since 1900, 65+ year olds tripled in number

• 85+ year old projected at 8.9 M by 2030– Major consumers of hospital inpatient care– Advanced age accompanied by chronic conditions

requiring surgeries, drug therapies

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Medical Specialization

• ~60% of physicians are specialists

• Americans demand specialty care and use of diagnostic testing

• Managed care relaxing hurdles to specialty care referrals

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Uninsured and Under-insured

• 47 million, 16% of Americans• Almost 75% of uninsured in households with

at least one full-time worker• No insurance: late care, medical

complications, emergency care, avoidable hospitalizations

• Costs passed to insurance premiums, taxes

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Labor Intensity

• People- centered services require high staff to consumer ratio

• New technologies require new, technically trained personnel

• Aging population contributes to home care, other personnel needs

• 3.2 M new jobs by 2014 will be in health services

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Economic Incentives

• Traditional payment for piece-work drove high utilization

• Managed care, prospective payment dulled incentives

• System still largely physician and hospital driven with continuing incentives for over-use

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Private Health Insurance

• 1800s: movement to insure workers against lost wages due to work injuries; later coverage added for serious illness

• Insurance payments to medical care providers not until 1930s

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Health Insurance Concepts

• Antithetical to “insurance” premise of guarding against unlikely events, health insurance evolved to pay for both routine and unexpected events– Indemnity coverage protected from all costs of

care; prevailed 1930s-1970 introduction of managed care

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Blue Cross/Blue Shield

• 1930 Baylor University teachers’ contract with Baylor, TX hospital to cover inpatient services on an annual basis– Model for Blue Cross development

• Blue Shield for physician payment followed in 1940s with AMA financing of Association of Medical Care plans

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Insurance Transformed Health Care (1)

• Established hospitals as centers of medical care proliferation & technology

• Put hospital care within easy reach of working population– Annual hospital admissions 50% higher for

covered individuals than nation as a whole by late 1930s

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Insurance Transformed Health Care (2)

• Private insurance countered forces that lobbied for national health insurance, strongly opposed by private medicine– Focused government insurance on low-income

individuals– Stimulated American Hospital Assn. & local

hospitals to subsidize semi-private and ward care for low-income populations

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Features of Blue Cross & Blue Shield

• Initially, not-for-profit corporations & community rated (without regard to demographics, occupation, etc.), later, experience- rated to compete with for-profit companies

• Since 1990s, many plans converted to for-profit status

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Commercial Health Insurance

• Entered market in decade following Blues

• Used experience-rating to charge higher premiums to less healthy; competed with Blues for healthy persons with lower premiums

• By early 1950s surpassed Blues’ enrollment

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Managed Care

• Throughout the 1960s, rapidly increasing Medicare expense, quality concerns by government and industry health insurance purchasers resulted in development of the HMO Act of 1973

• Many employer groups had used specific, contracted arrangements; Act opened participation to all employers

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HMO Act of 1973

• Loans & grants for planning, implementing combined insurance, health care delivery organizations

• Required comprehensive services for acute and preventive care

• Employers of >25 mandated to offer HMO option, if available & fund premiums=to prior plans

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HMO Fundamentals

• Links health care provision to prepayment

• Population, not individual-based reimbursement

• Financial risk-sharing among providers, insurers, consumers

• Intended to reverse incentives for utilization

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HMO Models

• Staff: MD employees provide primary care in HMO-owned facilities

• Independent Practice Association: Community-based MDs serve HMO members on pre-paid, fee-for-service, contracted basis

• Hybrids: group practice, network, direct contract

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Payment Methods

• Encourage cost-conscious, effective, efficient care

• Capitation: per-member per-month fee paid in advance whether or not services used

• Withholds: retains percentage of customary fee, refunded if targets met

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Financial Risk-sharing

• For Providers: capitation, withholds, expenditure targets

• For Subscribers: co-payments, deductibles

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Evolution of Managed Care (1)

• Point of Service (POS) plans spawned by demands for out-of-network choices

• Preferred Provider Organizations (PPOs): MDs & hospitals offer private payers & self-insured firms negotiated fee discounts in return for business volume guarantee (60 % of all employer-covered workers)

• Today, virtually all health insurance is some form of managed care

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Evolution of Managed Care (2)

• Disease Management• Use of evidence-based guidelines for

subscribers with high-risk medical and potentially high-cost conditions

• Identified from claims data• Insurer or contracted services to monitor

condition and ensure compliance

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Evolution of Managed Care (3)

• Primary physician “gatekeeper” role declining in importance– Subscriber demands for more choice in referrals

• Staff model decline

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Managed Care Backlash (1)

• Organized medicine, consumers protested restrictions on choice of providers, referrals, other practices

• Presidential commission est. to review patient protections– President Clinton imposed patient protections on

companies supplying federal workers

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Managed Care Backlash (2)

• Bipartisan Patient Protection Act proposed in 1998 never passed

• State legislatures led with 900+ laws & regulations addressing provider and consumer protections

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Managed Care Backlash (3)

• Consumer-Driven Health Plans: employers’ response to rising costs & demands for consumer choice– Employees take responsibility for health care

decisions and cost-consciousness– Health care reimbursement or Health Savings

Accounts using high-deductible policies– 2009: ~8% employee participation

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Trends in Managed Care Costs (1)

• 1990s: slowest rate of cost growth in years

• 1998: premiums rose again– Insurance underwriting cycle– Prescription drug costs– Investor pressures – Consumer demands for choice

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Trends in Managed Care Costs (2)

• 1999-2009, avg. family policy premiums increased 131% to $13,375

– Workers’ contribution: 17% single, 27% family• 40 hour/week minimum wage worker

($7.25/hour) gross earnings (before taxes) = $ 15,080

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Impact of Rising Premiums

• Higher worker contribution results in dropped coverage

• Employers use “benefit buy-downs,” reducing benefit scope, increasing co-pays, and/or deductibles– 1% increase in premiums= 164,000 additional

uninsureds

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Managed Care “Report Card”

• 5-year literature review notes failings in dual promise to lower costs and increase quality– Needed:

• Systematic information systems’ revamping• More appropriate provider incentives• Revised, evidence-based clinical processes

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Managed Care Industry Changes

• Consolidations & mergers: 5 publicly traded companies now enroll 103+ million members, 82% of all subscribers

• Responses to provider/consumer issues:– States’ patient protection legislation– Loosening of choice on patient referrals– Patient access to policies, esp. payment denials

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PART 2•Managed Care & Quality

•Self-funded Insurance Programs

•Government as Payer– Cost and Quality Initiatives

•State Experiments

•Future Challenges

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Managed Care Organizations and Quality

• American Association of Health Plans est. 1979; renamed National Committee on Quality Assurance (NCQA) in 1990– Independent, not-for-profit, funded by

accreditation fees and revenues from sale of a quality indicator compendium on 250 health plans serving 50 million Americans

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NCQA (1)

• Evaluations & accreditation on a voluntary basis for– Managed care organizations– Preferred provider organizations– Managed behavioral health organizations– New health plans– Disease management programs

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NCQA (2)• Accreditation entails rigorous reviews of all

organization aspects including on-line surveys and onsite visits:– Management, physician credentials, member rights

& responsibilities, preventive health services, utilization, medical records, disease management programs, outcomes of care, measures of clinical processes

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NCQA (3)

• Certifications for organizations that provide– Provider credentials’ verifications– Utilization management services– Disease management services

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HEDIS (1)

• Health Plan Employer Data and Information Set (HEDIS) evolved from partnership among health plans, employers and the NCQA in 1989.

• Standardized method for MCOs to collect, calculate, report performance information to facilitate plan comparisons by employers, other purchasers & consumers

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HEDIS (2)

• Data set contains 71 measures of MCO performance in 8 domains (“Report Cards”):

1. Effectiveness of care2. Accessibility & availability of care3. Satisfaction with care4. Health plan stability5. Use of service

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HEDIS (3)

• Domains, continued6. Cost of care

7. Informed health choices

8. Health plan descriptive information

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HEDIS Promotes Transparency

• Centers for Medicare and Medicaid Services requires all funded MCOs to report HEDIS data

• All NCQA accredited plans must publicly report their clinical quality data

• Many states require Medicaid managed care plans to report HEDIS data

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Internal MCO Quality Monitoring

• Physician performance & outcomes monitoring

• Hospital outcomes quality• Disease management programs, e.g.

– Patient self-management education– Risk stratification– Outreach with clinical specialists

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Self-Funded Insurance Programs (1)

• Large employer, union or trade association collects premiums, pays medical benefits claims instead of using a commercial carrier– Actuarial firm may set premiums– Third party administrator (TPA) administers

benefits, pays claims, collects utilization data, manages expensive cases

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Self-Funded Insurance Programs (2)

• Employer Advantages– Avoid administrative charges of commercial

carriers– Avoid state premium taxes– Accrue interest on reserves– Exemption from ERISA minimum benefits &

liability for plan coverage denial decisions

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Government as Payer: A System in Name Only (1)

• Early focus: military, government employees, special populations, e.g. Native Americans

• Now: Medicare, Medicaid, U.S. Public Health Service hospitals, state, local, long-term psychiatric facilities, Veterans Affairs, military & dependents, workers’ compensation, public health protection, service grants

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Government as Payer: A System in Name Only (2)

• “System:” Mosaic of reimbursement, vendors/purchaser relationships, matching funds, direct services, e.g.– Contracts with providers, not direct service

provision (Medicare, Medicaid, grants)– Federal with State matching funds (Medicaid)– Direct services (Veterans Affairs)

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Medicare: Historical Significance

• 1965: Title XVIII of Social Security Act• All Americans ≥65 yrs. entitled to health insurance

benefits; 20 million entered system in 1965.• Financed by payroll taxes• Conceded accreditation, administration to private

sector-JCAHO…Now “JC”• Hospital payments by local Blue Cross

intermediaries

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Initial Medicare Components

• Part A: Mandatory hospital coverage, outpatient diagnostics, extended care facilities, home care post-hospitalization; funded by Social Security payroll taxes.

• Part B: voluntary MD coverage, tests, medical equipment, home health; funded by beneficiary premiums matched with federal revenues

• Cost sharing: deductibles, co-insurance; medi-gap policies

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AdditionalMedicare Components

• Part C: Managed Care Options for Private Health Plan Enrollment (1997)

• Part D: Prescription Drug Coverage (2003)

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Growth in Medicare Expenditures

• Costs rose much more rapidly than expected• 1976: Most cost growth due to hospital personnel,

non-personnel and profits• Early amendments added covered services,

increased costs; quality concerns escalated through 70s and 80s.

• Later amendments addressed cost growth reductions and quality improvement

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Medicare Cost Containment & Quality Improvement Measures (1)

• Comprehensive Health Planning Act (1966): organize local health planning

• Professional Standards Review Organizations (1972): review Medicare hospital care.

• Health Systems Agencies (1974): plan for health resources based on population needs (replaced CHP); plans based on local population needs

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Medicare Cost Containment & Quality Improvement Measures (2)

• OBRA 1980, 1981 amendments to reduce hospital lengths of stay, advocating home care

• Tax Equity & Fiscal Responsibility Act (TEFRA) 1982: Peer Review Organizations (PROs) replaced PSROs, providing clearer cost/quality criteria;

• 2001: renamed PROs to QIOs (Quality Improvement Organizations)

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Medicare Cost Containment & Quality Improvement Measures (3)

• DRGs (1983): Shifted Medicare from – Pre-set hospital case reimbursement based on

diagnosis using the International Classification of Disease (ICDA) codes • Rewarded efficient care, financially penalized

inefficiency • Other insurers followed lead

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DRG Implementation (1)

• Predictions of “quicker/sicker” discharges proved unfounded

• Federal prospective Payment Assessment Commission (ProPac) established to review quality– Post-implementation research demonstrated no

deleterious effects on patient outcomes

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DRG Implementation (2)

• Slowed cost growth through length of stay reductions, personnel reductions

• Hospitals realized increased profits

• Impact of major shifts to outpatient services, shifting costs to private pay patients dampened cost-containment results

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DRG Cost Containment & Quality Improvement Measures (3)

• COBRA 1985: penalties for financially-motivated patient transfers

• Emergency Medical Treatment and Labor Act (1986) refined 1985 COBRA

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Cost Containment & Quality Improvement Measures (4)

• Physician Fees: Rapidly rising Medicare payments and specialty services prompted action:

• 1987-1989: price freeze ineffective; results suggested offset by increased volume

• 1992: RBRVS: Pay same amount for office procedures whether provided by specialist or primary physician; incentives for primary care practice; updated by AMA & specialty societies

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HIPAA

• 1996 Kennedy-Kassenbaum Bill– Reaction to failed Clinton National Health Security

Act• Prohibited coverage denial due to pre-existing

health condition• Ensured continued coverage between employers• Established “portable” Medical Savings

Accounts

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Cost Containment & Quality Improvement Measures (5)

• Balanced Budget Act of 1997:– Predictions of Hospital Trust Fund insolvency– Medicare unsustainable w/o cuts in other

programs, increased taxes & budget deficits– Medicare f-f-s outmoded in MCO environment– Medicare gaps for low income populations

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Balanced Budget Act of 1997

– Reduce Medicare spending growth rate over 5 years through direct and indirect cost reductions

– Fund State Child Health Insurance Program (SCHIP) to enroll 10+ million Medicaid-eligible children

– Introduce Medicare managed care– Enact demonstration projects on quality & cost

containment

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Balanced Budget Act Provisions

• New Medicare Part C-managed care• Demonstration projects• Prevention initiatives• Provider payment reductions• Anti-fraud & abuse provisions• Rural hospital initiatives• Outpatient & Nursing Home Prospective Payment

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Balance Budget Act Outcomes

• Significant decrease in Medicare spending growth through 2002; $ 68 B in savings

• Private insurers’ entry through Medicare Part C

• Successful SCHIP implementation

• Fraud & abuse financial recoveries

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Responses to BBA

• Strong resistance from affected groups– Balanced Budget Refinement Act (1999) to

curtail MCO withdrawals from Medicare +Choice (Part C)

– Consolidated Appropriations Act of 2000: restored $17 B in cuts, postponed/adjusted new payment schemes

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Ongoing Medicare Cost Reduction & Quality Improvement Initiatives (1)

• 2001: CMS “Quality Initiative” to monitor conformance with standards of care:– Hospitals, nursing homes, home health care

agencies, physicians, other facilities

• Medicare Quality Monitoring System: – Monitors quality of care delivered to Medicare f-f-

s beneficiaries

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Ongoing Medicare Cost Reduction & Quality Improvement Initiatives (2)

• Hospital “Pay-for-Performance” plans to reward positive patient results & efficient care

• “Hospital Compare” website: 20 criteria assessing hospital conformity with evidence-based practice

• Beginning in 2008 : No reimbursement for treatment of hospital acquired infections; investigating other options for “never happen” events and resulting treatment costs

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Ongoing Medicare Cost Reduction & Quality Improvement Initiatives (3)

• Hospital Consumer Assessment of Health Care Providers and Systems” surveys added to “Hospital Compare” to provide patient perspectives on hospital experience.

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Medicaid and the SCHIP

• 1965: Title XIX of Social Security Act

• Mandatory joint federal-state program– Shared state support based on state’s per capita

income

• Basic insurance coverage for 47 M low income individuals

• 16% of personal health service spending; 41% of nursing home care

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Medicaid Scope

• Federal government establishes broad guidelines; requirements are state-established– Low income families and children– Long-term care for older and disabled individuals– Supplemental coverage for low-income Medicare

beneficiaries for non-Medicare covered services

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Federally Mandated Medicaid Services

• Inpatient, outpatient hospital services• Physician services• Diagnostic services• Nursing home care for adults• Home health care• Preventive health screening• Pregnancy related & child health services• Family planning services

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Medicaid Expenditure Growth

• Growth in eligible populations, longevity• Provider payment increases• Disproportionate share hospital program• Growth in intensive & long term care• Increased survival of low birth weight infants

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Medicaid Funding

• Personal income tax, corporate and excise taxes

• Unlike Medicare, no entitlement; a transfer payment from more affluent to needy individuals

• Direct reimbursement to providers; no intermediary

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Medicaid Managed Care

• 1990s: States experimented with Medicaid managed care to stem 300% growth since 1980.

• 1993: Federal waivers allowing mandatory managed care accelerated enrollment.

• 1997: BBA lifted all waiver requirements• 50 states participate; majority of recipients in

managed care

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Children’s Health Insurance Program

• BBA targeted enrollment of 5 M children with federal matching funds, 1998-2007

• By 2008, 7 M enrolled; but 8.1 M remained uninsured

• Reauthorized in 2009 through 2013 with enhancements

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FIGURE 7-7 Number of Children Ever Enrolled in the Children’s Health Insurance Program.

Source: Children’s Health Insurance Statistical Enrollment Data System(SEDS) 1/29/09

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Medicaid Quality Initiatives

• The Center for Medicaid & State Operations (CMSO) develops & implements Medicaid & SCHIP quality initiatives with state programs

• Division of Quality, Evaluation & Health Outcomes provides technical assistance to states for quality improvement initiatives

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Medicaid Quality Strategies

1. Evidence-based care

2. Payment aligned with quality

3. Health information technology

4. Partnerships with internal & external expert organizations

5. Information dissemination, technical assistance, sharing best practices

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Future Prospects

• Little federal action 2000-2008 left major gaps in plans for cost control and access improvement

• States experimented with universal coverage since 2003

• 2008 presidential election focused on swift, major health care reforms

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State Experiments

• Maine: make affordable coverage available to all; decrease cost growth, expand Medicaid, improve quality

• Massachusetts: personal responsibility mandate with government subsidy

• Vermont: government, employer premium assistance; state-wide plan for preventing and managing chronic conditions

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Future Challenges

• Moral dilemma: defining values about allocations of resources

• Breaking lose from old philosophies, value systems and politics in implementing the Patient Protection and Affordable Care Act of 2010