Catch Me If You Can: Hospitals, Physicians, and the Game of Medicare Payment Policy Department of Health Evaluation Sciences University of Virginia School of Medicine October 13, 2004 Rick Mayes, Ph.D. Assistant Professor of Public Policy

2 Overview This presentation examines: 1.Larger trends in the U.S. health care system, generally, and in Medicare, specifically 2.Issues of specific concern to physicians and hospitals 3.Medicare’s financial relationship with physicians and hospitals and the controversy over increasing market segmentation

3 Underlying Medical Inflation: The Rise and Fall (and Rise Again?) of Managed Care Sources: Census Bureau, Kaiser Foundation, CMS, 2004.

4 Since 2001, on average million fewer jobs now provide health insurance in the U.S. -the avg. cost of health insurance premiums has increased 59% (versus 10-12% in wages & general inflation) -employee contributions for health insurance have grown: by 57% for single coverage (total of $3,695 annually, 2004) by 49% for family coverage (total of $9,950 annually, 2004) avg. premium for family coverage ($14,565 projected, 2006) - A growing proportion of the overall increase in premiums for employers has been “shared” with employees, particularly those in small businesses. Underlying Medical Inflation: Health Insurance Premiums Source: Henry J. Kaiser Family Foundation/Health Research and Education Trust Survey of Employer Health Benefits, Health Affairs Sept./Oct

5 Health Insurance Premiums & Declining Coverage

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7 Underlying Medical Inflation Affects Medicare Population Source: CMS Office of the Actuary, 2004.

8 Demographic Trends Source: Medicare Board of Trustees, 2003.

9 Actuarial Trends Source: Medicare Board of Trustees, 2003, 2004.

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11 Medicare’s new $534 billion Rx Drug Benefit

12 Tom Scully, former CMS Administrator “I hate this whole G--damn system. I’d blow it up if I could, but I’m stuck with it. If it were up to me, I’d buy everybody private insurance and forget about it. Obviously that’s what the Republican view is. We ought to do the same thing we do for federal employees: go out and buy every senior citizen a community-rated, structured, regulated private insurance plan. Let them buy an Aetna product, or Blue Cross products. That’s the Republican philosophy. Why should Tom Scully and his staff fix prices for every doctor and hospital in America? Which is what we do. - Personal interview with Tom Scully, Administrator, Ctrs. for Medicare & Medicaid Services,

13 The Failure of Medicare+Choice as a Model for Paradigm Change Sources: Medicare Health Plan Compare database, CMS February 2003.

14 Issues of Concern for Physicians: Growing Practice Expenses

15 Liability Insurance Crisis in U.S. Sources: New England Journal of Medicine and AMA, 2003.

16 The History of Medicare’s Relationship with Physicians Sources: GAO analysis of data from CMS and the Boards of Trustees of the Federal HI and SMI Trust Funds, 2004.

17 The History of Medicare’s Relationship with Physicians Sources: GAO analysis of data from CMS and the Boards of Trustees of the Federal HI and SMI Trust Funds, 2004.

18 Issues of Concern for Physicians: Growing Practice Expenses Source: CMS, Office of the Actuary, 2004.

Source: Stuart Guterman (CMS) The History of Medicare’s Relationship with Hospitals : Maximize Reimbursement First, Decrease Costs Later

Cost-Shifting “Hydraulic” for Medical Providers 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

21 Physicians & the Role of 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.

22 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

23 Source: Glenn Melnick, “Uninsured Americans,” Hearing Before the Subcommittee on Health of the Ways and Means, U.S. House of Representatives, 108th Cong., 2nd Sess. (9 March 2004); Professor Melnick’s testimony from the Center for Health Financing, Policy and Management, School of Policy, Planning and Development, University of Southern California. Technical Note: Data are derived from the Medicare Prospective Payment System’s Impact File, Centers for Medicare and Medicaid Services (CMS, 2004), available at last visited October 1, 2004).

24 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 = -.59

25 Source: MedPAC (June 2004) Segmentation of U.S. Health Care System Increasing

26 Source: CMS, Office of the Actuary, Segmentation of U.S. Health Care System Increasing

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28 Cost-Shifting (or Cross-Subsidization) Perhaps best thought of as a lubricant within a massive series of financial feedback loops between: - government (Medicare, Medicaid) - providers (hospitals, physicians) and - private payers (insurance companies, employers, patients).

29 POLICY implications of the significant rise in physician-owned: ambulatory surgery centers, specialty hospitals, and diagnostic imaging centers: 1.) prospects for improved quality, lower costs, and more professional autonomy - not a new phenomenon (e.g., heart hospitals in London 1857, psychiatry clinics, ear and eye hospitals, obstetrics & gynecology hospitals) - 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) - can easily exacerbate the development of a multi-tiered health care system

30 Present & Future Concerns (1) The ultimate cost shift is both prevalent and increasing in scope and degree: employers passing on a larger and larger share of their increased health care costs to their employees... - higher monthly wage deductions and/or increased co-payments, deductibles, out-of-pocket costs (especially for employees’ dependents) (2) Beyond this strategy, more and more employers have simply stopped offering health insurance... - (15% of the U.S. population is uninsured; 45 million individuals or the aggregate population of 24 states, Census 2003)

31 Conclusion : How much should the government pay medical providers? TOM SCULLY: “My frustration is that you’re trying to be a government contractor. Hospitals usually get about 50% of their revenues from Medicare & Medicaid; doctors, on average, generally come into practice getting roughly 30% or so from Medicare & Medicaid. So if you’re a doctor or if you’re a hospital, fundamentally a big chunk of your business is as a government contractor. And your expectation, I think, when dealing with the government—whether you’re in the Pentagon or in health care—is boring consistency, decent operating margins that don’t flop around. If you’re Boeing, you don’t want to have a 25% margin one year and a negative 2% the next year, right?” - Interview with Tom Scully, Administrator, Ctrs. for Medicare & Medicaid Services,

32 Exit Questions (1.) What do providers do (or have to do) when each payer only wants to pay the marginal cost? (2.) Who is ultimately responsible for the common good in a competitive market?