Health Care Financing

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Health Care Financing November 10, 2000
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Total Annual Health Spending Per CapitaConstant
(1998) Dollars
Source HCFA
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Costs as a percentage of GDP
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Why Healthcare Costs Rise
Purchaser / Consumer Separation

Enhanced Technology
Expectation of Perfection (Litigation)
Population Aging
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Average Expenditure Increase Per Capita - Excess
Beyond Inflation
Source HCFA
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Health Insurance

• Insurance to pay for the cost of illness and
  injury. It pays for hospitals, physicians and
  other providers

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History

• 1847 Massachusetts Health Insurance of Boston
  covers illness expenses
• 1861 Accident insurance covered injuries from
  rail and steamboat travel
• 1883 Bismark adopts compulsory coverage for
  accidents and illness in Germany
• 1929 Teachers contract with Baylor Hospital for
  room, board, and medical expenses in exchange for
  monthly fee
• 1932 Blue Cross Blue Shield begins to offer
  group policies to employers

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First HMO

• Health Maintenance Organization
• 1932 Sidney Garfield begins prepayment, .05 per
  worker per day to promote wellness and prevent
  industrial accidents. Optional .05 per day
  covered illness as well
• 1938 Henry Kaiser contracts with Dr. Garfield to
  treat workers on Grand Coulee Dam. Membership
  later opened to family members

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Growth Employee Benefit1940-1950

• Wage and price freeze and union membership drive
  growth of employee benefit plans
• Employers enhance benefit package to include
  health insurance

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Government Sponsored Insurance 1965

• Medicare provides coverage for elderly and
  disabled
• Medical provides coverage for poor

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Changes in Payment

• 1984 Payment By DRG
• Discounts to providers with managed care

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Shift in Payment

• Emergence of Government as Payer
• In 1965, 75 of payment from private sources
• By 1995 only 54 was private

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Change in Benefit Design

• Growth of Managed Care
• 1980 9.1 million Americans in Managed Care
• By 1995 that rose to 46 million
• The number is much higher now

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Managed CareCost--Choice Trade off
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Clinical Quality is Generally Better in Managed
Care than in Traditional Fee-for-Service Care

• Virtually every measure of preventive care is
  much higher for members in managed care plans
  than in traditional indemnity plans (CDC, OIG)
• Inappropriate, often dangerous, care has a higher
  incidence in FFS systems than in managed care
  (HCFA)
• Risk adjusted heart attack mortality rates were
  lower in managed care plans than traditional
  insurance (American Journal of Managed Care)
• Medicare women with breast cancer in HMOs have
  their cancer diagnosed at an earlier stage, and
  have better outcomes than those in traditional
  Medicare (JAMA)

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Backlash!
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Backlash!
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Managed Care at the Crossroads
Real managed care, as envisioned by Paul Ellwood
or Alain Enthoven is incompatible with economic
boom times with a tight labor market and a health
insurance system whose policies are part of the
labor contract Uwe Reinhardt
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Why Healthcare Costs Rise Piling On

Purchaser / Consumer Separation

Enhanced Technology
Class Action Lawsuits Against Managed Care and
Employers
Expectation of Perfection
Population Aging
Broad Direct Marketing of Drugs and Technology
Human Resource Shortages of Key Healthcare
Professionals
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Health Care OrganizationsCaught in the Middle
Historical Cost Increase Pressures
Balanced Budget Medicare Impact
Extraordinary Cost Increase Pressures
Employer Cost Concerns
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Acute Examples at Prestigious Organizations

• Harvard Pilgrim Health Plan
• Massachusetts General / Brigham and Womens
• Stanford / University of California at San
  Francisco
• Henry Ford Health System
• Sutter
• Allina
• Allegheny Health
• Catholic Healthcare West

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Status Quo Projections at IHC

• Annual total volume growth (inpatient and
  outpatient services, driven by population growth
  and utilization changes) 2.8 per year
• Reimbursement increase
• Medicare / Medicaid 1
• All other 3
• Expense increase
• Salaries, wages and benefits 5
• All other 3
• Depreciation 7
• No utilization, efficiency or other improvements

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Status Quo Projections at IHCRevenue and Cost
Revenue
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Todays Turbulence Is Likely to Catalyze New
Insurance Mechanisms

• Purchasers (both government and commercial) are
  likely to respond to increasing costs by placing
  consumers in a position of greater choice but
  with more significant responsibility than in
  the past
• The most dramatic incarnation of such a
  philosophy with a reasonable likelihood of
  implementation is employer-based
  defined-contribution
• In some ways, this is a non-government
  reincarnation of managed competition as
  discussed in the early 1990s
• As an alternative, national single-payer systems
  are again under discussion, but are not likely in
  the near future

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Medical Expense Stabilization Input
CostsCharge Per Case for Utah Hospitals
UU
StM
SLR
AV
LDS
ORMC
UV
McK
MV
CtWd
LV
Dav
AF
AP-DRG Adjusted Trended by Size (Admit Rate) -
1998
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Facilitate Medical Expense Stabilization

• Implement indications for care guidelines in
  all clinical programs
• Provide cost per case, cost per episode and cost
  PMPM incentives (depending on the clinical
  program) for physicians
• Develop product designs that place greater
  financial incentive for efficient care on the
  consumer to avoid adversarial care management
  and prepare for defined contribution

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Protocol for treatment of Pneumonia

• 67 Different combinations of antibiotics
• Protocol established best practice
• Documented 25-47 improvement in mortality
• 10 improvement in expense
• 25 improvement in complications

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Facilitate Medical Expense Stabilization-
Involve the Consumer Financially
Consumer

Health Plan
Physician
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THE END