Health Care Economics and Why it Matters

2 Paying for Medical Care Pre-WW II Mostly Private Pay Some Employer Provided - Kaiser The Blues WW II Price Controls Health Insurance As Benefit Post WW II Private Insurance The Blues Medicare/Medicaid

3 The Blues Blue Cross Hospital insurance Blue Shield Physician insurance Historically controlled by the providers Paid what was charged Subsidized the rural areas and care of the poor Subsidized over-bedding and over treatment Nobody cared until the 1970s

4 Social Security Income and Disability 1930s Lifted the elderly out of poverty Retirement age was older than life expectancy Why does this matter a lot? 1956 Amendments - Provided disability insurance Big and valuable program and pays for a lot of medical care - 7.5M people Gamed a lot and manipulated both ways by Congress (reference)reference

5 Hill-Burton Post-WWII Funded construction of community hospitals Had community service requirements, but those have all expired Created the US emphasis on hospital based care Spent from the 1970s to the 1990s reducing hospital beds to control costs Excess beds or Surge Capacity?

6 The Great Society Inventing the Modern Elderly Medicare Old People Certain disabled people Medicaid Poor People Nursing Homes - old/disabled About 40% of federal medical dollars Politics Fought by the AMA Made Docs Rich

7 The Federal Role Feds Pay About 45% of Health Care Medicare, Medicaid, TriCare, VA System Other Plans Follow the Feds Usual and Customary Charges for Docs Based on the Community Adjusted for the Docs Previous Charges Complex

8 What do We Spend? Total health care spending Medicare 2008 Factsheet

9 Implications of Spending for Torts Hospitals Single biggest component In the tort world, remember Willie Sutton Outpatient Surgery Centers, Specialty Hospitals, and Imaging Centers Increasingly capturing revenue from hospitals Doc run - lots of conflicts of interest Good future in med mal Pharm and Medical Devices Growing share of the market Best tort target Physicians Specialists who do procedures Primary care

10 Perverse Incentives The #1 corrupting incentive in health care is that insurers pay for doing stuff and giving drugs, not for thinking and talking to patients. Only thing new is the amount of money at stake Hospitals Longer stays, more intense treatment, attempts to keep the dead warm For many years, hospitals did not even know what things cost, they just charged what they needed to make money Nonprofit and forprofit are about the same Drug and Device Companies Bribe docs to over prescribe and use inappropriate but expensive drugs and devices Docs Unnecessary procedures/Feel good drugs/Get a piece of the action on tests Federal law prevents kickbacks and fraud - not a tort, but interesting. All of these depend on the myth that more care is good care

11 Changing the Game for Hospitals Diagnosis Related Groups - DRGs Watershed in Health Care Reimbursement Prospective Payment (Capitation) Based on Admitting Diagnosis Fixed Payment Some Adjustments Encouraged health insurers to also manage physician care Only apply to Medicare, but influence other insurance

12 Making Money Under DRGs Fewer Tests and Procedures Complete Reversal of Prior Reimbursement No Bump for ICU Reduce Length of Stay Dropped About 20% at Once, continued to drop Ideal Is Out the Door, Dead or Alive Patients Discharged Much Sicker Which Was Right, Then or Now?

13 Controlling Docs - Laws Enabling Managed Care Federal HMO Act in the 1970s Preempted State Laws Banning Prepaid Care ERISA Passed to allow labor unions to negotiate national health plans with big employers Preempts state regulation of certain self-insured health plans Gave self-insured plans an edge and drove most employers to them

14 Managed Care Organizations - MCOs Insurance Plans That Control Patient Care Includes the Old Alphabet Soup HMOs PPOs IPAs

15 Two Major Variables Employer or Contractor Do the docs work for the plan or a captive group? Do the docs contract with many plans, treating patients based on different plan benefits? Open or Closed Do the docs treat only patients from a single plan or a mix of plans? Why do these matter? Leverage on the doc's decisions

16 Direct Controls on Costs by the Plan Pay Less for Services Use Market Power to Bargain Control Access Points Limit Hospital Stays Limit Tests, Procedures, and Referrals Direct Control of Access Pre-approval Tell the Docs What to Do Most Honest

17 Indirect Controls Capitation CRF--Consultation and Referral Funds Withhold and Incentive Pools Stop-loss and Reinsurance Total Capitation Economic Credentialing Dumb Down Services Free Ride on Other Plans or the Government

18 Current State of Doc Control by Insurers Managed care backed off direct control More emphasis on just paying less Providers and businesses that do procedures, run labs, or sell drugs and devices use their money as political power to protect their income #1 cost problem Rich docs are not automatically better docs Primary care has seen its pay cut in real terms over the past 20 years Cannot even attract US trained docs to primary care residencies in many places

What do We Get for Our Money?

20 U.S. Has A Lower Life Expectancy than Most Other Industrialized Countries Taken as a major criticism of the US system Is life expectancy really the right measure?

21 Life Expectancy Is Not Health Bias Weighted Toward the Young One Baby Is Worth Several Grannies Only Life Counts Discounts Quality of Life Nursing Home Is As Good As the Ski Slopes Masks Aging Population Masks Improved Health A Good Measure for Developing Countries

22 What Complicates Health in the US? We Have 3rd World Public Health Ineffective Prenatal Care Poor Immunization Practices Limited Access to preventive and routine care Teen Pregnancy Prematurity Poor Parenting Developed World Leader in AIDS

23 Non-medical Issues The Problem of the Poor Poor Education Poor Health Habits Cannot Afford Prevention Geography Too Many Isolated Areas Expensive to Deliver Care

24 How has the Health Care Umbrella been Expanded? Sin to Sickness Alcoholism Drug Abuse Miscatagorization Nursing Homes - housing? Vanity Surgery - life style? Should Compare Total Social Welfare Budget with Europe General social welfare spending is much higher in Europe

25 The Core Problem Public health and primary care does not work well Chronic diseases can be mitigated, but not cured or prevented Shifts care to expensive technology and drugs Emphasis on drugs also makes us a drug-ridden society DARE as a joke How do tell a kid that Adderal is good and meth is bad?

26 Impact of Governmental and Private Plan Economics and Special Interests on Care High tech care has the strongest interest groups Providers and suppliers have a lot of money Patient advocacy groups are easy to capture Captures every more of the budget Primary care, prevention, and public health Not sexy Big savings are low tech, long term Not a good news story Providers do not have the money to lobby

27 Patient Directed Care Example Patients will spend their own money and will thus make better decisions What is their knowledge base? Can you really learn what you need on the WWW? How will this play out for preventive care? What is the incentive for providers? Feel good drugs? Antibiotics?

28 Why it will Get Worse: Second Order Demographics People live longer because of medical care and public health More old people More people with chronic illness do not die Old people need more Total cost goes up Health is much more expensive than death

29 The Real Third Rail: Retirement Age What are current implications of a system designed for people to retire at 65 when the average life expectancy was about 60? What should retirement age be? How does increasing the retirement age help pay for health care? How would this change society? What about the

30 Health Care Reform Who will lose? Who will win? How will we pay for expanding access?