HSA 3111: Health Services Financing 1 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Topics Financing Complexity Insurance Public Financing for Healthcare Payments and Reimbursements Issues and Trends “Financing is the lifeblood of any health care delivery system. At a basic level, it determines who will pay for health care services for whom.” Text, p. 237

HSA 3111: Health Services Financing 2 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Financing Complexity Healthcare Financing in the U.S. is distinguished by stunning complexity compared to other developed countries A dizzying array of payers –Private insurance companies –Government agencies –Out of pocket

HSA 3111: Health Services Financing 3 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Financing Complexity (cont.) A single provider billing for a single type of procedure may face –Different rates allowed by each of several payers –Still a different rate for uninsured patients –A different mix between patient and payer payment responsibility for the procedure –The possibility of multiple payers for the same patient and procedure –Different patient payments depending on deductibles, prior payments, and/or their insurance policy

HSA 3111: Health Services Financing 4 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Financing Complexity (cont.) Some payers contract with other agencies to administer their programs –Piggyback on the administrator’s network of providers and administrative systems –Piggyback on the administrator’s office systems Processing Money management Administration Payment

HSA 3111: Health Services Financing 5 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Financing Complexity (cont.) Three functions of HC Finance –Financing—providing the money –Insuring Assuming the risk Administering the programs –Paying—Paying providers Service providers are the fourth element of the HC system, delivery HMOs may integrate all four functions

HSA 3111: Health Services Financing 6 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Financing Healthcare Most Americans receive healthcare paid by insurance –Private insurance –Medicare –Medicaid/SCHIP Out of Pocket includes –Uninsured payments –Copays and deductibles for insured individuals

HSA 3111: Health Services Financing 7 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Financing Healthcare (cont.) Payment for the insurance coverage comes from various sources –Employer health insurance: Employer and employee contributions –Private health insurance: The Insured pays all costs –Medicare: Medicare taxes + General taxes –Medicaid: General revenue taxes

HSA 3111: Health Services Financing 8 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Insurance Insurance is a mechanism for protecting against risk Insured persons face probabilities of bad things happening to them –Accident– Illness –Death– Fire An adverse event has a financial cost The expected value of the event is the probability of the event occurring times the cost of the event if it occurs

HSA 3111: Health Services Financing 9 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Insurance (cont.) The total risk faced by an insured, i, is the sum of all risks for that person or company The insured pays an amount covering risk plus overhead –Profit –Administrative costs –Marketing costs

HSA 3111: Health Services Financing 10 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Insurance (cont.) Insurers calculated the expected risks and costs they will face for large groups of people and price policies accordingly –Revenues are the sum of all payments –Some insurers are able to invest retained premiums (not a big factor in health insurance) –If actual adverse event occurrences are higher than expected and/or actual costs of adverse events are higher than expected then profits are reduced

HSA 3111: Health Services Financing 11 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Insurance (cont.) Insurers (cont.) –If actual occurrences and/or costs are lower than expected then profits are higher –Insurer profits = Premiums + investment income – loss payments – underwriting expenses –While the probability of an adverse event for any one person is tough to predict the probability over thousands of people is much more reliable –Insurers make money by pooling risk to stabilize their expected payouts

HSA 3111: Health Services Financing 12 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Insurance (cont.) A “moral hazard” exists when –One party has private information about a transaction –The private information affects the value of the other party’s participation in the transaction

HSA 3111: Health Services Financing 13 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Insurance (cont.) Moral Hazard (cont.) –If a person knows of a health condition that is more likely to lead to an expense (↑P Ei ) than for the ‘average’ person… –…And if the insurer is unaware of this risk The person receives a discount on insurance The insurer will pay more than expected in claims –We will see this concept in the pricing of different insurance products

HSA 3111: Health Services Financing 14 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Insurance (cont.) Individual Private Insurance –Individuals purchase insurance on their own directly from an insurance company (or HMO) –This insurance is usually much more costly than group insurance (next slide) because there is a moral hazard component to the market How does this hazard come about in this circumstance? –Many types of people use individual insurance Self employed Early retired Unemployed Employees with no plan

HSA 3111: Health Services Financing 15 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Insurance (cont.) Group Insurance –Employer, Union, and Professional Organizations often constitute “Groups” which contract with an insurer for insurance –Typically, all members of the group must participate in the insurance program –Mandatory participation reduces moral hazard Healthy and unhealthy employees (and family members) must participate Healthy payments cover payments to unhealthy The larger the group the more stable the costs

HSA 3111: Health Services Financing 16 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Insurance (cont.) Group Insurance Tax Implications –Employer contribution is a tax deductable expense –(Most) benefits received by employees are not taxed as income If employer gave contribution directly to the employee –Employee pays tax on the income –Pays higher rates for individual insurance Employee contribution also “pre tax” –Employers becoming less generous as unemployment rates go up

HSA 3111: Health Services Financing 17 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Insurance (cont.) Employer Self Insurance –Large enough employers can self insure –Bear the risk of payouts –Don’t have to pay insurance company profit or marketing costs (↓ O i ) –Typically contract with a traditional insurer to administer the plan –Self insurance plans are also exempt from providing some mandatory coverages –55% of covered employees were in self insured plans

HSA 3111: Health Services Financing 18 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Insurance (cont.) Managed Care Plans –HMOs and PPOs group more of the functions of financing into a single organization Insuring Paying Providing services –Employees in HMOs –Contracted providers in PPOs –Managed Care plans have more control over costs in the overall transaction

HSA 3111: Health Services Financing 19 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Insurance (cont.) Cost Sharing spreads payment risk to insured –Deductable—amount insured must pay before benefits begin –Co-pay—amount insured must pay when services are rendered Provider Payment = Co-pay + Insurance Pmnt

HSA 3111: Health Services Financing 20 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Insurance (cont.) Personal Implications –The entire insurance function has extreme personal implications for you –You should always be aware of What benefits, including covered services, co- pays, stop losses, etc., you have What your options are if you lose your current coverage How legislative or regulatory changes may affect you personally

HSA 3111: Health Services Financing 21 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Public Financing for Healthcare Numerous public (government) health financing programs exist –Military, retired military, veterans, and military family coverage –Medicare and Medicaid (1965) –PACE (1997) –SCHIP (1997)

HSA 3111: Health Services Financing 22 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Medicare Four types of coverage –Part A: Hospitalization –Part B: Non-hospital medical insurance Voluntary Mixed funding: Premiums + gov’t subsidy –Part C: Managed Care Programs for Medicare participants –Part D: Prescription coverage

HSA 3111: Health Services Financing 23 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Medicare (cont.) Medicare Financing –Medicare Part A (and later Part C & D) have been funded by current workers for current eligibles –Excess contributions go into trust funds Supposed to cover future needs, including the aging baby boomers Projections call for depletion of the trust funds by 2018 (right when I need them)

HSA 3111: Health Services Financing 24 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Medicaid Health services for the indigent –A “means-tested” program Medicaid is administered by each state –Federal government contributes funds Level of coverage varies from state to state –States provide additional funding –States set eligibility requirements –States set benefits coverage

HSA 3111: Health Services Financing 25 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Other Programs PACE (Program of All-inclusive Care for the Elderly) –Combines Medicare and Medicaid coverage –No co-pays or deductibles SCHIP (State Children’s Health Insurance Program) –Covers uninsured children –Less restrictive eligibility (higher income threshold) than Medicaid

HSA 3111: Health Services Financing 26 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Other Programs (cont.) Military Health Services System –Many components –Mix of insurance and employed and contract providers –Available to active duty, dependents, and retired and retired dependents Veterans Health Administration –Veterans with service-connected conditions (first priority) –Veterans with income limitations –Dependents of veterans killed on duty

HSA 3111: Health Services Financing 27 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Other Programs (cont.) Indian Health Service –Clinics, public health, dental, and other services –Focus of services is near Native American populations

HSA 3111: Health Services Financing 28 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Payments and Reimbursements Large payers and providers negotiate or set rates of reimbursement for services There are different approaches to setting rates –Fee for service: Specific rates for a specific service Providers have incentive to provide services Neither provider nor insured patients pay the costs

HSA 3111: Health Services Financing 29 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Payments and Reimbursements (cont.) Rate Setting (cont.) –Bundled Charges Bundles related specific services into a bundle for a more general definition of the service Sets rate for the bundled services Specific patients use more or fewer specific services for the more generalized treatment How does this approach shift incentives?

HSA 3111: Health Services Financing 30 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Payments and Reimbursements (cont.) Rate Setting (cont.) –Resource-Based Value Scale Specific treatments are categorized by –Time ‒ Effort –Expertise A base cost factor is established –Varies geographically Payments based on base cost factor x value Only the base cost need be adjusted over time Used for Medicare payments

HSA 3111: Health Services Financing 31 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Payments and Reimbursements (cont.) Rate Setting (cont.) –Diagnosis-Related Groups Each group is a diagnosis with an expected –Bundle of services that will be needed –Total cost Rates are set for the diagnosis group Adjustments made for –Geographic area –“Outlier” patients

HSA 3111: Health Services Financing 32 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Payments and Reimbursements (cont.) Rate Setting (cont.) –Case-Mix Methods Patient condition-based analysis determines expected expenditures Patient condition places them into groups that are “uniform in their consumption of services” Payment made on historical consumption by the group, not on specific uses of services by the patient

HSA 3111: Health Services Financing 33 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Issues and Trends Pay For Performance –Healthcare financing is marked by a disconnect between three parties Decision makers Payers Beneficiaries (consumers) –Theory predicts that healthcare will be over used (cost more) –In theory P4P attempts to induce decision makers to make more cost-effective decisions

HSA 3111: Health Services Financing 34 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Issues and Trends (cont.) Insurance Continuity –An employee’s current insurance plan and the potential cost or loss of coverage for a new plan skew decision making Job lock—staying with a job for the benefits even if it is not a good prospect Impeding small business start-ups –COBRA and HIPAA provide for continuation of employer coverage at employee expense –Also prohibited preexisting condition exclusions –Provided some tax benefits

HSA 3111: Health Services Financing 35 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Issues and Trents (cont.) Erosion of Private Insurance –Large numbers of individuals are uninsured or underinsured –Income levels where uninsured families exist are rising –Financial conditions affect gross figures Employers not needing to be as competitive Employers using more part-time employees (not eligible for benefits)

HSA 3111: Health Services Financing 36 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Issues and Trends (cont.) Risk Selection –Insurers are able to treat individuals differently based on medical history –They can deny, reduce, or charge extra for coverage –Insurers would prefer nothing but healthy people in their risk pool –Everyone else faces high costs or no coverage

HSA 3111: Health Services Financing 37 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Issues and Trends (cont.) Financing the Uninsured –Uninsured patients do receive healthcare –Use about half the healthcare of the insured –Are often unable to pay when they do receive treatment Governments and hospitals must step in to pay Providers (usually hospitals) must cover unreimbursed treatments by increasing costs to paying patients

HSA 3111: Health Services Financing 38 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Issues and Trends (cont.) Fraud and Abuse –The sheer magnitude of the HC financing system makes fraudulent activity attractive –GAO estimated that 10% of health spending is fraudulent Claims for nonexistent patients Claims for procedures never rendered “Upsizing” treatments –Enforcement resources are inadequate