Medicare, Cost Shifting and Universal Coverage: The Economic Unraveling of U.S. Health Care RAM/AMA -- VCU School of Medicine March 2008 Rick Mayes

2 OVERVIEW This presentation examines: 1.major economic trends in U.S. health care system 2.The phenomena known as cost shifting and provider segmentation, the “medical arms race” they are fueling, and the implications for doctors, hospitals, and patients. 3.growing concerns and potential reforms

3 Source: OECD Data 2007

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5 BACKGROUND Since health insurance premiums have increased more than 78% ( versus 18% in general inflation and avg. wage growth ) - avg. cost of single coverage ($4,500 annually in 2007) - avg. cost of family coverage ($12,000 annually in 2007) The percent of companies offering health insurance to their workers has fallen from 69% in 2000 to approx. 58% in 2007 (6 million working Americans have lost their coverage since 2000 )

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7 Health Insurance Premiums & Declining Coverage

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10 Consequences: Care Postponed & Never Received

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13 Extreme Consequences: Bankruptcy & Earlier Death 50% of uninsured patients have debts from previous medical care; a 1/3 rd 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. (Kaiser Commission, 2002) *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).

14 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

15 Four Key Facts about U.S. Health Care 1. 16% of the U.S. population is uninsured (huge financial drain on state governments and medical providers, as well as a major cause of immense human suffering and decreased economic productivity) 2. Each year, approximately 20% of the insured and uninsured populations in the U.S. drive roughly 80% of all health care spending and consumption. 3. Health care involves high “fixed” costs (buildings, equipment, salaried personnel, overhead) and low “marginal” or variable costs (Rx drugs, food, paper, gloves, gowns, tests). example: an MRI 4. There are several “payers” (Medicare, Medicaid, employers, health insurers, individuals) but only one set of medical “providers” (doctors, hospitals, nurses, etc.), which fuels financial gamesmanship by health insurers and providers.

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

17 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.

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

19 Source: American Hospital Association’s Annual Survey of Hospitals (n=6,800 hospitals), Pearson’s correlation coefficients: : Medicare and Private ratios: r = : Medicare and Private ratios: r = : Medicaid and Private ratios: r = : Medicaid and Private ratios: r = -.64

20 Growing 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; 46 million individuals or the aggregate population of 24 states, 2005)

21 Economic Incentives & Health Care The segmentation and migration of medical care to non-hospital settings: - free standing diagnostic imaging centers - ambulatory surgery centers (ASC’s) - physicians’ concierge medical practices Health Savings Accounts (HSA’s) and the decline of risk-pooling provided by group health insurance

22 Migration of Medical Care Provision is Increasing

23 Outpatient surgery is also rapidly migrating to non-hospital settings… Physician Offices Freestanding Facilities Hospital-based Facilities Source: Verispan’s Diagnostic Imaging Center Profiling Solution, *2005 values are estimates. Percent of Outpatient Surgeries by Facility Type,

24 …as the number of ambulatory surgery centers (ASC’s) has increased rapidly. Source: MedPAC, A Data Book: Healthcare Spending and the Medicare Program, June 2005 Number of Medicare-approved ASCs,

25 …and 83 percent of ASCs are wholly- or partly-owned by physicians. Source: American Association of Ambulatory Surgery Centers. ASC Ownership Survey. February Ownership Structures of ASCs, 2004

26 Self-referral has been linked to increased utilization of diagnostic services… Number of Imaging Services Ordered per Physician-owner vs. Non-owner Source: United States Government Accountability Office, Medicare Referrals to Physician Owned Imaging Facilities Warrant HCFA’s Scrutiny, GAO/HEHS-95-2, Oct

27 …and financial incentives influence where physician-owners direct and treat patients. Hospital Outpatient Surgery Cases /951/967/961/977/971/987/98 1st full month of ASC operation Orthopedic Surgeries Performed by Physician-owners at a Full-service Community Hospital Before and After Ambulatory Surgery Center Opening, October September 1998 Source: Lynk WJ and Longley CS. (2002). “The Effect of Physician-owned Surgicenters on Hospital Outpatient Surgery.” Health Affairs 21: 218.

28 POLICY implications of the significant rise in physician-owned, for-profit: ambulatory surgery centers, specialty hospitals & 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) - exacerbates the development of multi-tiered health care (e.g., elite, average, poor)

29 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 $2,000.

30 Woo B. N Engl J Med 2006;355: Median Compensation for Selected Medical Specialties

31 Bodenheimer T. N Engl J Med 2006;355: Family Medicine Residency Positions and Number Filled by U.S. Medical School Graduates

32 Bodenheimer T. N Engl J Med 2006;355: Proportions of Third-Year Internal Medical Residents Choosing Careers as Generalists, Subspecialists, and Hospitalists

33 Woo B. N Engl J Med 2006;355: Percent Change between 1998 and 2006 in the Percentage of U.S. Medical School Graduates Filling Residency Positions in Various Specialties

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

35 Moral Hazard: term used to describe the paradoxical fact that insurance can change behavior of the person insured. example: employer-provided “donut” insurance (e.g., 5 cent co-pay) 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) Conclusion II: instead of expanding group health insurance, reduce it The “Moral Hazard” Argument Against Expanding Health Insurance Coverage

36 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 (or 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” ( ) BOTTOM-LINE: health insurance is moving in the “actuarial” direction (similar to car insurance) and away from the “social insurance” model with enormous consequences…

37 Two Exit Questions to Think About What do providers have to do when every payer only wants to pay the marginal cost? Ultimately, who is responsible for the common good (i.e., graduate medical education, charity care, medical research) in a competitive market?