MCV’s Neurology Grand Rounds The Economic Unraveling of U.S. Health Care: Cost Shifting, Provider Segmentation, and Health Savings Accounts MCV’s Neurology Grand Rounds December 14, 2006 Rick Mayes, Ph.D. Assistant Professor, Department of Political Science

Overview This presentation examines: Major economic trends in U.S. health care system The “cost shifting” and “provider segmentation” phenomena and their implications for doctors, hospitals and patients Potential reforms and future concerns

BACKGROUND Since 2000 . . . health insurance premiums have increased 73% (versus 14% in general inflation and avg. wage growth) - avg. cost of single coverage ($4,000 annually in 2005) - avg. cost of family coverage ($11,000 annually in 2005) The percent of companies offering health insurance to their workers has fallen from 69% in 2000 to 60% in 2005 (5.5 million working Americans have lost their coverage since 2000)

Source: Kaiser Family Foundation (2005)

Health Insurance Premiums & Declining Coverage

The Uninsured, 15.6% of the U.S. Population (Census, 2005)

Consequences: Care Postponed & Not Received

Extreme Consequences: Bankruptcy & Earlier Death 50% of uninsured patients have debts from previous medical care; a 1/3rd are being pursued by collection agencies * Uninsured women with breast cancer are twice as likely to die as women with breast cancer who have health insurance. (Kaiser Commission, 2002) Men without health insurance are nearly 50% more likely to be diagnosed with colon cancer at a later, more dangerous stage than men with insurance. * Upwards of 750,000 families are bankrupted by medical debt each year, even though 80% of them have some form of health insurance; single largest cause of bankruptcy (Health Affairs, 2005).

Arnold and Sharen Dorsett with their children, Dakota, Zachery and Jessica, back. Though they had insurance, health-care costs for Zachery led the Dorsetts to file for bankruptcy this year. Nicole Bengiveno/The New York Times

Cost-Shifting “Hydraulic” for Doctors & Hospitals B = C + Margin Contribution 130% B 120% Cost Shift 110% A C Cost 100% Shortfall 90% Margin 80% 70% Payment-to-Cost Ratio 60% Above Cost Payers Below Cost Payers 50% 40% 30% 20% 10% 10 20 30 40 50 60 70 80 90 100 Percentage of Market Share

Physicians & Cost-Shifting (or “Differential Pricing”) Source: The Lewin Group, “The American College of Emergency Physicians (ACEP) Practice Expense Study,” for the American College of Emergency Physicians.

Community Hospitals & the Role of Cost-Shifting The correlation coefficient between Private Payer Payment-to-Cost Ratio and Medicare, Medicaid & Uncompensated Care cost shift burden is 0.753 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200% 5% 10% 15% 25% Medicare, Medicaid & Uncompensated Care Cost Shift Burden (in %) by State Private Payer Payment-to-Cost Ratio Source: The Lewin Group analysis of data contained in AHA TrendWatch Chartbook: Trends Affecting Hospitals and Health Systems.

Source: American Hospital Association’s Annual Survey of Hospitals (n=6,800 hospitals), 2006. Pearson’s correlation coefficients: 1984-1997: Medicare and Private ratios: r = -.86 1980-2004: Medicare and Private ratios: r = -.79 1984-1997: Medicaid and Private ratios: r = -.39 1980-2004: Medicaid and Private ratios: r = -.64

Source: Glenn Melnick, “Uninsured Americans,” Hearing Before the Subcommittee on Health of the Ways and Means, U.S. House of Representatives, 108th Cong., 2nd Sess. (9 March 2004); Professor Melnick’s testimony from the Center for Health Financing, Policy and Management, School of Policy, Planning and Development, University of Southern California. Technical Note: Data are derived from the Medicare Prospective Payment System’s Impact File, Centers for Medicare and Medicaid Services (CMS, 2004), available at http://www.cms.hhs.gov/providers/hipps/ippspufs.asp, last visited October 1, 2004).

Segmentation of U.S. Health Care System is Increasing Source: MedPAC (June 2004)

Complicating the Hospital-Physician Relationship

Source: CMS, Office of the Actuary, 2004. Segmentation of U.S. Health Care System Increasing Source: CMS, Office of the Actuary, 2004.

3.) impact on communities’ overall access to care POLICY implications of the significant rise in physician-owned, for-profit: ambulatory surgery centers, specialty hospitals, and diagnostic imaging centers: 1.) prospects for improved quality, lower costs, and more professional autonomy - Adam Smith and the advantages of specialization (e.g., pins and “focused factories”) 2.) financial impact on community hospitals: fair or unfair competition? - “cherry picking” the best-insured private patients by, largely, for-profit entities - “skimming” lower-cost, healthier Medicare cases within individual DRGs - cardiac, orthopedic, radiological services: huge proportion of hospitals’ net revenues 3.) impact on communities’ overall access to care - declining volume & smaller patient populations make charity care harder to provide - vulnerability of emergency services, burn units, psychiatric facilities - complicates doctor-hospital relationships (e.g. staff privileges, economic credentialing) - can easily exacerbate the development of a multi-tiered health care system

Reimbursement, Incentives & Human Behavior Public Policy 101: Incentives structure modern life as we know it. e.g., IRS and tax audits, HOV lanes and toll roads, Dean’s List and academic probation, parenting, teaching, dating, sales, Amway, etc. Incentives come in 3 basic flavors or varieties (e.g., smoking): (a.) moral: U.S. gov’t asserts that terrorists raise money from black-market sales of cigarettes (b.) social: banning of cigarettes in restaurants and bars (c.) economic: $3-per-pack “sin tax” (… but not in Virginia obviously)

Moral/Social Incentives and Modern Life The Chicago Police Department in conjunction with the Mayor's office have now made prostitution solicitors' information available online. By using this website, you will be able to view public records on individuals who have been arrested for soliciting prostitutes or other related arrests. The following individuals were arrested and charged for either patronizing or soliciting for prostitution. It is not a comprehensive list of all individuals arrested by the Chicago Police Department for patronizing or soliciting for prostitution. The names, identities and citations appear here as they were provided to police officers in the field at the time of arrests.                        DOE/SMITH, CARLOS M/31 165XX BRENDEN LN. OAKPARK 1102 N CICERO AVE 2005/10/01 720 ILCS 5.0/11-15-A-1 DOE/SMITH, JOSE M/37 54XX S ROCKWELL ST CHICAGO 1102 N CICERO AVE 2005/10/02 720 ILCS 5.0/11-15-A-1 DOE/SMITH, JOHN M/54 28XX W 38TH PL CHICAGO 2500 S CALIFORNIA BLVD 2005/09/06 720 ILCS 5.0/11-15-A-1 DOE/SMITH, ALEX M/28 22XX MAGNOLIA CT WEST BUFFALO GROVE 1102 N CICERO AVE 2005/10/02 720 ILCS 5.0/11-15-A-1

Economic Incentives and Modern Life - Australian prison ships in the early 1900s - April 15, 1987 and the disappearance of of 7 million American children - frequent flyer miles (“loyalty programs”)

Segmentation of U.S. Health Care System Increasing: Concierge Medicine Patients like Ilse Kaplan, left, receive more personal attention from Dr. Bernard Kaminetsky in exchange for an annual fee of about $1,650.

Segmentation of U.S. Health Care System Increasing: HSA’s

The “Moral Hazard” Argument Against Expanding Health Insurance Coverage Term used to describe the paradoxical fact that insurance can change behavior of the person insured. example: employer-provided “donut” insurance or auto insurance avg. annual amount spent on medical care (by uninsured person) = $934 avg. annual amount spent on medical care (by insured person) = $2,347 Conclusion I: co-pays, deductibles, utilization reviews make patients use health care more “efficiently” (frugally, wisely, sparingly, etc.) Conclusion II: instead of expanding group health insurance, reduce it

The “Moral Hazard” Argument Against Expanding Health Insurance Coverage Fallacy I: Moral-hazard argument only makes sense if we consume health care in the same way we consume donuts, car repairs or consumer goods. Fallacy II: Having to pay for your own care does not automatically make ALL of your health care consumption more “efficient.” How could it? example: wife’s appt. with dermatologist Reality: cost-sharing is a very BLUNT instrument example: RAND Corporation’s “Health Insurance Experiment” (1971-86) BOTTOM-LINE: health insurance is moving in the “actuarial” direction and away from the “social insurance” model w/enormous consequences to come…

Concerns The ultimate cost shift: employers passing on a larger and larger share of their increased health care costs to their employees in the form of higher monthly wage deductions and/or increased co-payments, deductibles, and out-of-pocket costs (especially for employees’ dependents). Beyond this strategy, more and more employers have simply stopped offering health insurance (16% of the U.S. population is uninsured; 45.6 million individuals or the aggregate population of 24 states, 2005)

The Massachusetts Health Plan: Individual Mandate

Exit Questions (1.) What do providers have to do when every payer only wants to pay the marginal cost? (2.) Ultimately, from a political economy perspective, who is responsible for the common good (e.g., graduate medical education, public health insurance, medical research) in a competitive market?