Estimating Delivery Efficiency National Health Insurance Policy Brief 10 Estimating Delivery Efficiency 8 March 2010

Utilization Efficiencies Under Managed Care Effect of Efficiency on USA Hospital Costs (Inpatient + Outpatient). Note similarity in shape of curves at different levels of managed care efficiency.

Utilization Efficiencies Under Managed Care

Comparison of Bed Utilisation and LOS figures in the USA and South Africa Van Eck H, Besesar S. Hospital Admission Rates for the Medical Scheme Population in SA: Is there a Supplier Induced Demand Problem? Comparison with Hospital Admission Rates in the USA Private Hospital Review 2009: Hospital Association of South Africa; 2009.

CMS Published admission rate Comparing RSA and USA published admission rates per 1000 population in 2007 reveals a major gap … 301.7 Is the CMS correct in implying that this is due to supplier-induced demand? 169.5 per 1000 132.2 CMS Published admission rate Published admission rate (IP only - USA Definition) Patients of low acuity are systematically being admitted to hospital” (in the RSA private sector), CMS report brief 1 of 2008 5

Comparing Apples with Apples? Published admission rate Is this an ‘Apples with Apples’ comparison of RSA and USA admission rates ? RSA admissions per 1000 301.7 USA admissions per 1000 224.4 Comparing Apples with Apples? 132.2 136.5 121.6 114.8 101.2 98.3 CMS Published admission rate IP (RSA Definition) IP (USA Definition) Adjusted to exclude uninsured population Adjusted to RSA maternity rates Adjusted to RSA age profile Exclude normal newborns (as per RSA) Published admission rate (IP only - USA Definition)

CMS Published admission rate What adjustment to RSA average length of stay (ALOS) is required in order to compare ‘Apples with Apples’? ALOS 3.16 301.7 ALOS 4.53 ALOS 5.6 224.4 Census Method ALOS ALOS 5.14 132.2 136.5 136.5 CMS Published admission rate IP (RSA Definition) IP (USA Definition) IP (USA Definition) and Census method ALOS Published admission rate (IP only - USA Definition) Adjusting RSA to Census Method for counting ALOS

Effect of forms of managed care design on cost curves by age Second graph is risk-adjusted. “This modest difference once spending is risk adjusted suggests that most of the 20 percent observed difference is due to selection differences, not taste, or moral hazard. The implied cost savings from the HMO and POS with capitated from the most common plan type of preferred provider organizations (PPOs) is less than 5%, with a modest gradient upward with age.” Source: Ellis R.P. (2008) Risk adjustment and predictive modeling. US privately-insured health care spending, by age and health plan type, 2004.

Why are Managed Care Plans Less Expensive? Expenditures per enrollee are US$188, or 9.3 percent, lower for HMOs relative to non-HMOs. Decomposing this -US$188 difference into its component parts, it is estimated that: US$46 is due to different utilization of medical services due to differences in plan design and management [the utilization effect]; US$22 is due to differences in observed enrollee characteristics [risk selection]; US$13 is due to differences in unobserved enrollee characteristics [also risk selection]; and and -US$269 is due to relatively low HMO provider reimbursement levels. Source: Polsky D, Nicholson S. Why are Managed Care Plans Less Expensive: Risk Selection, Utilization, or Reimbursement? The Journal of Risk and Insurance. 2004;71:21-40.

Implications for Modelling “The core of the problem still remains: there is inadequate information to develop cost curves by age and gender for delivery of quality healthcare in the public sector. Faced with the excellent data from private sector medical schemes, what adjustment needs to be made to the private sector costs curves to estimate the public sector cost curves? The answer is, as actuaries and economists, we simply do not know.” “In the absence of clear evidence of how to adjust the private sector data for the cost of delivery in the public sector, the McLeod-Grobler-Van der Berg model allows for a “family” of cost curves to be developed to illustrate the sensitivity of the total cost to this critical assumption.” Source: IMSA NHI Policy Brief No.10: Estimating Delivery Efficiency under NHI

Initial Costing of NHI 2009 Excludes administration and managed care costs. Preliminary work. Needs adjustments for effect of benefits becoming mandatory, anti-selection effect and evolution of HIV epidemic on NHI population. Source: Servaas vd Berg and Heather McLeod, August 2009

Innovative Medicines South Africa (IMSA) is a pharmaceutical industry association promoting the value of medicine innovation in healthcare. IMSA and its member companies are working towards the development of a National Health Insurance system with universal coverage and sustainable access to innovative research-based healthcare.   Contact details: Val Beaumont (Executive Director) Tel: +2711 880 4644 Fax: +2711 880 5987 Innovative Medicines SA (IMSA) Cell: 082 828 3256 PO Box 2008, Houghton, 2041. South Africa val@imsa.org.za www.imsa.org.za

Professor Heather McLeod Material produced for IMSA by Professor Heather McLeod hmcleod@integratedhealingmbs.com www.integratedhealingmbs.com