1 Nicholas C. Petris Center on Healthcare Markets & Consumer Welfare Nicholas C. Petris Center on Healthcare Markets & Consumer Welfare Cost Shifting and Universal Coverage M-3 Workshop Medical College of Virginia (MCV) Richmond, Virginia Rick Mayes, Ph.D. Assistant Professor of Public Policy, University of Richmond Research Fellow, The Petris Center on HealthCare Markets & Consumer Welfare School of Public Health, University of California Berkeley

2 Three Guiding Questions Part 1: Why is the U.S. the only major western nation without universal health insurance coverage (15.6% of the population is uninsured = 45 million people or the aggregate population of 24 U.S. states)? Part 2: Why did we ever get managed care (e.g., HMOs) when doctors, hospitals, and patients despise it and love fee-for- service insurance? Part 3: How does the American health care system manage to survive, even though 45 million people are uninsured?

3 The Uninsured in the United States 1990s: unlike virtually all other socioeconomic indicators… working- and middle-class phenomenon: 20 million Americans who earn between $25,000 and $75,000 are uninsured 30% of the working-/middle-class is uninsured (2004, U.S. Census Bureau) 15 million Americans buy their coverage in the “individual” health insurance market (rather than the “group” market) and the number is rising rapidly – you better hope you never have to do this!

4 The Uninsured in the United States

5 the leading cause of personal bankruptcy (approximately 596,198 individual families and individuals declared bankruptcy due to lack of health insurance, insufficient health insurance, and/or substantial medical bills; 2002) 8.5 million or 12% of all children are uninsured; estimated to rise by another 900,000 by 2006 (GAO, White House Report, 2002)

6 Part 1: Why No Universal Coverage? Possible explanations… -- universal coverage is too expensive -- American welfare policy is too stingy -- traditional opposition by medical providers, particularly physicians (the AMA)

7 Alternative “Political Economy” Explanation Critical Junctures/Tipping Points Increasing Returns Path Dependency

8 Critical Junctures/Tipping Points rare, largely unpredictable, and hugely consequential for what comes after e.g., QWERTY keyboard, VHS/Betamax, Apples/PCs, health epidemics, illegal music downloading mathematical illustration (e.g., BINGO raffle-basket) personal examples (e.g., college major, marriage)

9 Increasing Returns Each subsequent step after a critical juncture reinforces the initial event/decision due in part to large set-up or fixed costs e.g., frequent flier-programs, public policies in general, and especially entitlement programs Momentum builds due to learning effects, decreasing marginal costs and increasing benefits for continuing down the existing path. increasing penalties and costs for exiting from the current path

10 Path Dependency The benefits of sticking with a particular program or arrangement increase to the point that they outweigh any dramatic departure (e.g., senior professors and technology) In effect, path dependency is the end product of policymakers’ having strong incentives to focus on a single alternative, and to continue moving down a specific path once initial steps are taken in that direction.

11 Critical Juncture and Increasing Returns Social Security, 1935: old-age insurance and unemployment insurance “in,” health insurance “out” NLRB ruling in 1948 regarding health insurance as a fringe benefit of employment and labor unions’ decision in 1949— with the defeat of President Truman’s National Health Insurance plan—to pursue health insurance through the private route of collective bargaining famous GM-UAW 1948 contract

12 Health Insurance’s Critical Juncture & Increasing Returns

13 One Problem With Employer-Provided Health Insurance Private, employer-provided health insurance creates gaps Answer: build on the existing public social insurance program, Social Security… Medicare/Medicaid, 1965 Still took the death of a President, a landslide Democratic victory in 1964, and a “financial deal” with hospitals and doctors to pass Medicare.

14 One Problem With Medicare: Cost

15 Path Dependency & the U.S. Health Care System Clinton’s health reform effort in showed how entrenched our patchwork system of health care is. The proposal, and alternatives in Congress, overly threatened existing health insurance arrangements of the 85% of the population covered for the goal of covering the remaining 15% of the population who were uninsured. None of them ever even came close to be voting on on either floor of Congress. Only 2 options: large tax increase or employer mandate

16 Part 2: Why Did We Ever Get Managed Care? and Part 3: How Does Our Health Care System Survive? Answer: largely because of extensive cost-shifting (or cross- subsidization of costs among different types of payers) by medical providers has always existed to varying degrees (like any service industry: e.g., airlines, higher education; unlike McDonald’s)

17 Hospital Cost Shifting “Hydraulic" 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

18 When Did Cost Shifting Take Off? Epochal change to Medicare in 1983 led to rapid increase in the utilization and extent of cost shifting in the late 1980s/early 1990s. Prospective Payment and 467 Diagnosis-Related Groups (DRGs)

19 Hospitals Profit Initially But Then Congress… Source: ProPAC, Medicare and the American Health Care System, Report to the Congress (Washington: June 1995 and 1996), 55 and 68, respectively.

20 Hospitals and Cost Shifting Cost Shifting (or Cross-Subsidization or Price Discrimination) is particularly attractive when 60-80% of hospitals’ total costs are fixed (e.g., MRI scan) and roughly 50% of hospitals’ revenues come from Medicare & Medicaid. (e.g., cutting costs at colleges/universities) Definition of Cost Shifting: “When changes in administered prices of one payer lead to compensating changes in prices charged to other payers for care.” Paul Ginsburg, former Chair of the Physician Payment Review Commission (PPRC)

21 Hospitals Turn to Cost Shifting: Private Gains & Public Losses, Source: ProPAC, Medicare and the American Health Care System, Report to the Congress (Washington: 1994), 29.

22 Interview With Former ProPAC Chair, Stuart Altman Altman: There is absolutely no question about it: hospitals cost-shift. The not-for- profit hospitals are dominated by people whose view of life and hospitals is this: they first look at what their costs are and then they look at where they are going to get the revenue from to pay those costs. They don’t look at maximizing revenue or profits first. They look at their costs first. And their job as hospital administrators is to generate the revenue to equal those costs. Mayes: It’s not to decrease costs? Altman: Absolutely not! It is NOT to decrease costs. You lose your job if you decrease costs. You’re going to piss somebody off, some doctor group, or patients. You’re going to lose your prestige in the community, because you don’t have something: a piece of medical equipment, a particular medical specialist, whatever it might be. I mean, lowering costs is not on any not-for-profit administrator’s agenda. They only lower costs when they can’t find the revenue. It’s the same thing at a university. Which president of a university or a dean gets credit for whacking faculty salaries or for cutting the size of the faculty or whatever. I was a dean and you don’t win games with that. The only way you can afford to cut costs is if the market or the legislature won’t give you the necessary revenue. And hospitals are the same way.

23 Cost Shifting Passed Along to Insurers/Employers Percentage Increase in Fee-for-Service Insurance Premiums,

24 Employers Respond to Cost Shifting Source: Employee Benefit Research Institute, Sources of Health Insurance (Washington, February 1995).

25 Managed Care Worked for a While at Saving $$ Average Annual Rate of Increase in All Health Insurance Premiums,

26 Public Policy Implications Cost shifting is what enables many medical providers to cover their “charity care” and “under-reimbursed” costs. Cost shifting implicitly “taxes” the premium rates of insured individuals. This “tax” may price some small business purchasers out of the insurance market altogether. This cost shifting “tax” varies dramatically state by state.

27 For Community Hospitals, as the Cost Shift Burden Increases the Private Payment-to-Cost Ratio Increases, 2001 Source:The Lewin Group analysis of data contained in AHA TrendWatch Chartbook: Trends Affecting Hospitals and Health Systems, 2001.Includes data for hospitals that reported data in the AHA Annual Hospital Survey. 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

28 Aggregate Hospital “Payment-to-Cost” Ratios for Private Payers, Medicare and Medicaid (1980 – 2001) Source: The Lewin Group analysis of American Hospital Association Annual Survey data, 1980 – 2001 Private Payer Medicare Medicaid

29 Cost Shifting among Academic Health Center Hospitals has Declined Source:The Lewin Group, “Financial Performance of Academic Health Center Hospitals, 1994 – 2000,” prepared for The Commonwealth Fund, September 2002.

30 As have Academic Health Center Hospital Margins Source:The Lewin Group, “Financial Performance of Academic Health Center Hospitals, 1994 – 2000,” prepared for The Commonwealth Fund, September 2002.

31 Evidence of Physician Cost Shifting Source: The Lewin Group, “The American College of Emergency Physicians (ACEP) Practice Expense Study”, for the American College of Emergency Physicians, September 15, 1998.

32 Conclusion: A Critical Juncture Approaching? Cost Shifting today… -- Health care costs and insurance premiums increasing again by an average of between 10 and 15% a year since 2000, the largest annual increases since Employers passing much of it along to employees in the form of increased: deductibles, co-pays, and monthly payments. More and more small businesses (10 or fewer employees) dropping coverage. -- ** rise of private, physician-owned surgical, radiological centers ** Exit Question: What do providers do when every payer only wants to pay the marginal cost? How do we finance the entire health care system?