The U.S. Health Care System: What Can be Learned? Bruce J. Fried, PhD Director, Masters Degree Program Department of Health Policy & Administration School of Public Health University of North Carolina at Chapel Hill June 6, 2008

Goals for Today To describe the central elements of the US health system and trends in financing To analyze the extent to which the goals of the health system have been met To predict future directions for the health system To identify lessons from the US experience

Three Health System Goals Quality of Care Access to Care Contain costs Can we achieve all three of these goals at the same time?

The Paradoxes of the US Health System An excellent system for those who access to the system A poor system for those without access An uncertain system for many

A central point: The US does not have a single health care system The US has multiple systems, each with its own goals and patient population

Multiple Systems Medicare: a system for the elderly and people with certain disabilities Private insurance system for people under 65 Medicaid: A System for some poor people The Veterans Health System The military health care system The Indian Health Service A non-system for people under 65 without insurance Dispersed public health system, mostly on the state level

Differences Among States The states have systems that vary in complexity and priorities. Large variations across states in: –Policies –Payment systems –Health care usage patterns –Illness burden –State and federal contributions to healthcare costs

Health System Financing Where does the money come from?

The Major Health Financing Mechanisms Out-of-pocket payment Private Health Insurance –HMOs –Preferred Provider Organizations (PPOs) –Point-of-service Plans –High Deductible Health Plans –Conventional Health Plans Public Health Insurance –Medicare –Medicaid –Children’s Health Insurance Plan

Private Insurance Private insurance includes a wide variety of health plans and providers Commercial insurance companies, Blue Cross/Blue Shield, self-insurers, and managed care organizations (MCOs) all offer private health insurance Private insurance is financed most commonly by premium sharing between employers and individuals, or by individuals alone

Basic Types of Private Insurance by Funding Self-funded Group insurance Individual insurance

Private Health Insurance: Some Basic Concepts and Definitions

Managed Care Managed care is a very general term referring to an organized effort by insurers and providers to use financial incentives and organizational arrangements to provide health care services efficiently at lower costs. Examples: Pre-authorization for care Restrictions on care (for example, placing limits on the number of doctor visits) Financial incentives to physicians to practice more efficiently Restricting access to a small set of providers (Adapted from Williams and Torrens, 6 th Edition, p. 125)

Adverse Selection People with higher than average risk of needing health care are more likely than healthier people to seek health insurance. Adverse selection results when these less healthy people disproportionately enroll in a risk pool. The ultimate outcome of adverse selection is a “death spiral.”

Community Rating A method of setting health insurance premiums under which all policy-holders are charged the same premium

Health Maintenance Organization (HMO) Patients get almost all care (primary and specialty) from a group of physicians and other practitioners The HMO agrees to take full responsibility for its patients’ care The HMO is paid a fixed, regular fee per patient (capitation payment).

Preferred Provider Organization (PPO) Providers join together to form a PPO The PPO physicians agree to provide services at a discounted, fee-for-service rate to the plan’s enrollees Point-of-Service (POS): PPO enrollees may obtain services from non-PPO providers, but at higher co-payments.

High-Deductible Health Plans These insurance plans have low premiums but high deductibles Philosophy is that high deductibles will cause consumers to use care more efficiently Costs are shifted to the consumer These plans are usually coupled with tax- advantaged Health Savings Accounts Because deductibles are so high, many people go without care

Methods of Paying for Health Services Fee-for-service Capitation Prospective Payment (for example, DRGs)

Trends in the Cost of Care

Estimated Hospital Expenditures by Source (total = $571 billion) SOURCE$ in 2004 (in billions) % Increase from 2000 Private Insurance203+41% Public Sources*321+35% Out-of-Pocket19+36% Philanthropy28+27% Source: CMS, 2006

Estimated Physician Expenditures by Source (total = $400 billion) SOURCE$ in 2004 (in billions) % Increase from 2000 Private Insurance194+42% Public Sources*138+42% Out-of-Pocket40+25% Philanthropy28+27%

Estimated Dental Expenditures by Source (total = $82 billion) SOURCE$ in 2004 (in billions) % Increase from 2000 Private Insurance41+32% Public Sources*5+100% Out-of-Pocket36+29% PhilanthropyLess than 10

Estimated Nursing Home Expenditures by Source (total = $ 115 billion) SOURCE$ in 2004 (in billions) % Increase from 2000 Private Insurance9+13% Public Sources*70+30% Out-of-Pocket32+23% Philanthropy4-20%

Government Public Health Expenditures by Source, 2004 Total: $51 billion Private Sources: $0 Public Sources: $56 billion (Federal = $9 billion; State & Local = $47 billion

Total health expenditures in the United States were $1,309 billion in 2000 and $1,878 billion in 2004, a 43% increase.

What is Causing the Increases? Rising wages in the health care sector. Technology Consumer demand for less restrictive plans (movement from HMOs to PPOs) Legislation (BBRA, prescription drug) that increases Medicare spending. Drugs

Estimated Prescription Drug Expenditures by Source (total = $188 billion) SOURCE$ in 2004 (in billions) % Increase from 2000 Private Insurance90+50% Public Sources52+86% Out-of-Pocket47+42% Philanthropy0-

Factors Contributing to Growth in Prescription Drug Spending

A Closer Look at the Reason for Prescription Drug Increases Shift in payment from out-of-pocket to 3 rd parties An aging population More prescriptions per person Drug prices (CMS)

Key Trend Cost-shifting to patients is occurring at all levels of the health system.

Trends in Employer-Based Health Insurance The level of employer-sponsored coverage is declining in all 50 states. In 2005, three out of five employers (60 percent) offered health insurance coverage, down from 69 percent in 2000.

Percentage of Firms Offering Health Benefits: Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits,

Key Trend Many employers are getting out of the business of providing health insurance. For those continuing to offer insurance, patients are paying a higher proportion of the total premium, and paying higher co-payments and deductibles.

Public Insurance Programs Medicare Medicaid Children’s Health Insurance Program Veterans Administration Indian Health Service

Medicare Basics Medicare is a federal program that covers individuals 65 and over, as well as some people with specific diseases and disabilities. Administration Medicare is a single-payer program administered by the government; single-payer refers to the idea that there is only one entity (the government) performing the insurance reimbursement function.

Medicare Gaps Many gaps in Medicare coverage –Incomplete coverage for skilled nursing facilities – Incomplete preventive care coverage, and no coverage for dental, hearing, or vision care. –Consequences of incomplete coverage The vast majority of enrollees obtain supplemental insurance: “Medigap” Overall, seniors pay about 22% of their income for health care costs despite their Medicare coverage. Source: The Kaiser Family Foundation

The Problem of Costs in Medicare From 1950 to 2004, the percentage of Americans ages 75 and older rose from 3 percent to 6 percent. The number is projected to reach 12 percent by 2050 A small number of sick people account for most health care expenditures. According to one report, 10 percent of patients accounted for 69 percent of health expenditures.

Options to Reduce Medicare Expenditures Beneficiary premiums and cost-sharing Scaling back tax cuts (so more general revenues available) Reduce provider payments Reduce Medicare benefit package Increase age of eligibility Change Medicare from defined benefits to defined contribution

Other Cost Containment Strategies for Medicare Hospital and physician payment mechanisms Disease management and clinical practice guidelines Cost-shifting to consumers

Medicaid Medicaid is a program designed for the low-income and disabled. By federal law, states must cover very poor pregnant women, children, elderly, disabled, and parents. Childless adults are not covered, and many poor individuals make too much to qualify for Medicaid. States’ Autonomy States have the option of expanding eligibility if they so choose

Medicaid Administration The states and the District of Columbia are responsible for administering the Medicaid program. Effectively, 51 different Medicaid programs in the country. Financing –Medicaid is financed jointly by the states and federal government through taxes. –Every dollar that a state spends on Medicaid is matched by the federal government at least 100% –In poorer states, the federal government matches each dollar more than 100% –Overall, the federal government pays for 57% of Medicaid costs.

Medicaid Concerns Difficulty finding providers that accept Medicaid due to its low reimbursement rate Difficulty finding providers that accept Medicaid due to its low reimbursement rate Increasing costs and Medicaid managed care Increasing costs and Medicaid managed care While a national program, there is variation in benefits among states While a national program, there is variation in benefits among states

Paying for Health Care A mix of methods

Hospital Payment Since the early 1980s, hospitals are reimbursed by a prospective payment system based on Diagnosis Related Groups (DRGs) Pay-for-Performance Financing medical education

Physician Payment: Many Variations Fee-for-service Capitation Salary Resource-Based Relative Value Scale (RBRVS) is a system used to determine how much money medical providers should be paid. It is currently used by Medicare and nearly allo HMOs.

Provider Incentives by Type of Payment Fee-for-Service: Over-treat Prepayment: –Decrease costs by under-treating –Unload high-cost patients –Focus more on prevention Salaried providers: No financial incentive for productivity

Hospital Responses to Reduced Revenues Two out of three CEOs report their hospitals are making money, but only one-third report margins in excess of 4 percent. Reduce costs: shorter lengths of stay Alternatives to emergency departments Outpatient care: Sixty-three percent of all surgical operations in community hospitals in 2003 were performed on outpatients, up from 51 percent in 1990 and 16 percent in 1980.

Trends A System Under Stress

Key Trend Health care spending continues to increase faster than inflation. According to government projections, health care spending will climb from its current level of 16 percent of the gross domestic product to 20 percent, about $4 trillion, within a decade.

A Health System Under Stress: The Uninsured The US faces not only a problem with the uninsured but also with people who are under- insured.

Number of Nonelderly Uninsured, in Millions: Source: US Census Bureau, Changed methods in 1999

A System Under Stress: Cost of the Uninsured Preventable morbidity and mortality associated with being uninsured translates into a loss of between $65 billion and $130 billion annually.

Key Trend Lack of insurance coverage is an issue that is increasingly affecting the middle class. This may put pressure on politicians to reform health financing.

A System Under Stress: Consumers Thirty-five percent of U.S. consumers expect their direct health care costs to increase by more than 25 percent over the next few years.

A System Under Stress: Hospitals Forty-eight percent of hospital emergency departments report being at or over capacity.

A System Under Stress: The Public Sector While health care costs continue to grow and health insurance becomes less affordable, the public sector has fewer resources to respond to growing needs for coverage or subsidized care.

Key Trend Healthcare reform efforts are taking place at the state level rather than on the federal level. But much depends on the November 2008 election

What Can be Learned? Much to be learned from mistakes All policy changes have anticipated and unanticipated consequences