11

Health Care Financing

November 10, 2000

Health Care Financing

November 10, 2000

22

Total Annual Health Spending Per CapitaConstant (1998) DollarsTotal Annual Health Spending Per CapitaConstant (1998) Dollars

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

1950 1960 1970 1980 1990 2000

Source: HCFASource: HCFA

33

Costs as a percentage of GDPCosts as a percentage of GDP

8%10%12%14%16%18%20%22%

Perc

enta

ge o

f G

DP

1980 1985 1990 1995 2000 2005 2010 Year

Health Care SpendingPercent of GDP

44

Why Healthcare Costs RiseWhy Healthcare Costs Rise

EnhancedTechnologyEnhanced

Technology

PopulationAging

PopulationAging

Purchaser / Consumer Separation

Purchaser / Consumer Separation

Expectationof

Perfection(Litigation)

Expectationof

Perfection(Litigation)

$$

55

Average Expenditure Increase Per Capita - Excess Beyond InflationAverage Expenditure Increase Per Capita - Excess Beyond Inflation

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

1950 1960 1970 1980 1990 2000

Source: HCFASource: HCFA

Medicare Mgd Care Backlash

66

Health InsuranceHealth Insurance

Insurance to pay for the cost of illness and Insurance to pay for the cost of illness and injury. It pays for hospitals, physicians and injury. It pays for hospitals, physicians and

other providersother providers

Insurance to pay for the cost of illness and Insurance to pay for the cost of illness and injury. It pays for hospitals, physicians and injury. It pays for hospitals, physicians and

other providersother providers

77

HistoryHistory

• 1847 Massachusetts Health Insurance of Boston covers 1847 Massachusetts Health Insurance of Boston covers illness expensesillness expenses

• 1861 Accident insurance covered injuries from rail and 1861 Accident insurance covered injuries from rail and steamboat travelsteamboat travel

• 1883 Bismark adopts compulsory coverage for accidents 1883 Bismark adopts compulsory coverage for accidents and illness in Germanyand illness in Germany

• 1929 Teachers contract with Baylor Hospital for room, 1929 Teachers contract with Baylor Hospital for room, board, and medical expenses in exchange for monthly feeboard, and medical expenses in exchange for monthly fee

• 1932 Blue Cross Blue Shield begins to offer group 1932 Blue Cross Blue Shield begins to offer group policies to employerspolicies to employers

• 1847 Massachusetts Health Insurance of Boston covers 1847 Massachusetts Health Insurance of Boston covers illness expensesillness expenses

• 1861 Accident insurance covered injuries from rail and 1861 Accident insurance covered injuries from rail and steamboat travelsteamboat travel

• 1883 Bismark adopts compulsory coverage for accidents 1883 Bismark adopts compulsory coverage for accidents and illness in Germanyand illness in Germany

• 1929 Teachers contract with Baylor Hospital for room, 1929 Teachers contract with Baylor Hospital for room, board, and medical expenses in exchange for monthly feeboard, and medical expenses in exchange for monthly fee

• 1932 Blue Cross Blue Shield begins to offer group 1932 Blue Cross Blue Shield begins to offer group policies to employerspolicies to employers

88

First HMOFirst HMO

• Health Maintenance OrganizationHealth Maintenance Organization

• 1932 Sidney Garfield begins prepayment, $.05 per worker 1932 Sidney Garfield begins prepayment, $.05 per worker per day to promote wellness and prevent industrial per day to promote wellness and prevent industrial accidents. Optional $.05 per day covered illness as wellaccidents. Optional $.05 per day covered illness as well

• 1938 Henry Kaiser contracts with Dr. Garfield to treat 1938 Henry Kaiser contracts with Dr. Garfield to treat workers on Grand Coulee Dam. Membership later opened workers on Grand Coulee Dam. Membership later opened to family membersto family members

• Health Maintenance OrganizationHealth Maintenance Organization

• 1932 Sidney Garfield begins prepayment, $.05 per worker 1932 Sidney Garfield begins prepayment, $.05 per worker per day to promote wellness and prevent industrial per day to promote wellness and prevent industrial accidents. Optional $.05 per day covered illness as wellaccidents. Optional $.05 per day covered illness as well

• 1938 Henry Kaiser contracts with Dr. Garfield to treat 1938 Henry Kaiser contracts with Dr. Garfield to treat workers on Grand Coulee Dam. Membership later opened workers on Grand Coulee Dam. Membership later opened to family membersto family members

99

Growth Employee Benefit1940-1950

Growth Employee Benefit1940-1950

• Wage and price freeze and union membership drive Wage and price freeze and union membership drive growth of employee benefit plansgrowth of employee benefit plans

• Employers enhance benefit package to include health Employers enhance benefit package to include health insuranceinsurance

• Wage and price freeze and union membership drive Wage and price freeze and union membership drive growth of employee benefit plansgrowth of employee benefit plans

• Employers enhance benefit package to include health Employers enhance benefit package to include health insuranceinsurance

1010

Government Sponsored Insurance 1965

Government Sponsored Insurance 1965

• Medicare provides coverage for elderly and Medicare provides coverage for elderly and disableddisabled

• Medical provides coverage for poorMedical provides coverage for poor

• Medicare provides coverage for elderly and Medicare provides coverage for elderly and disableddisabled

• Medical provides coverage for poorMedical provides coverage for poor

1111

Changes in PaymentChanges in Payment

• 1984 Payment By DRG1984 Payment By DRG

• Discounts to providers with managed careDiscounts to providers with managed care

• 1984 Payment By DRG1984 Payment By DRG

• Discounts to providers with managed careDiscounts to providers with managed care

1212

Shift in PaymentShift in Payment

• Emergence of Government as PayerEmergence of Government as Payer

• In 1965, 75% of payment from private In 1965, 75% of payment from private sourcessources

• By 1995 only 54% was privateBy 1995 only 54% was private

• Emergence of Government as PayerEmergence of Government as Payer

• In 1965, 75% of payment from private In 1965, 75% of payment from private sourcessources

• By 1995 only 54% was privateBy 1995 only 54% was private

1313

Change in Benefit DesignChange in Benefit Design

• Growth of Managed CareGrowth of Managed Care

• 1980 9.1 million Americans in Managed Care1980 9.1 million Americans in Managed Care

• By 1995 that rose to 46 million By 1995 that rose to 46 million

• The number is much higher nowThe number is much higher now

• Growth of Managed CareGrowth of Managed Care

• 1980 9.1 million Americans in Managed Care1980 9.1 million Americans in Managed Care

• By 1995 that rose to 46 million By 1995 that rose to 46 million

• The number is much higher nowThe number is much higher now

1414

Managed CareCost--Choice Trade offManaged CareCost--Choice Trade off

$0.65

$0.70

$0.75

$0.80

$0.85

$0.90

$0.95

$1.00

Cost

HMO Contract PPO IndemnityChoice

Health InsuranceRelative Premium Rates

1515

Clinical Quality is Generally Better in Managed Care than in Traditional Fee-for-Service CareClinical Quality is Generally Better in Managed Care than in Traditional Fee-for-Service Care

• Virtually every measure of preventive care is much higher Virtually every measure of preventive care is much higher for members in managed care plans than in traditional for members in managed care plans than in traditional indemnity plans (CDC, OIG)indemnity plans (CDC, OIG)

• Inappropriate, often dangerous, care has a higher incidence Inappropriate, often dangerous, care has a higher incidence in FFS systems than in managed care (HCFA)in FFS systems than in managed care (HCFA)

• Risk adjusted heart attack mortality rates were lower in Risk adjusted heart attack mortality rates were lower in managed care plans than traditional insurance (American managed care plans than traditional insurance (American Journal of Managed Care)Journal of Managed Care)

• Medicare women with breast cancer in HMO’s have their Medicare women with breast cancer in HMO’s have their cancer diagnosed at an earlier stage, and have better cancer diagnosed at an earlier stage, and have better outcomes than those in traditional Medicare (JAMA)outcomes than those in traditional Medicare (JAMA)

• Virtually every measure of preventive care is much higher Virtually every measure of preventive care is much higher for members in managed care plans than in traditional for members in managed care plans than in traditional indemnity plans (CDC, OIG)indemnity plans (CDC, OIG)

• Inappropriate, often dangerous, care has a higher incidence Inappropriate, often dangerous, care has a higher incidence in FFS systems than in managed care (HCFA)in FFS systems than in managed care (HCFA)

• Risk adjusted heart attack mortality rates were lower in Risk adjusted heart attack mortality rates were lower in managed care plans than traditional insurance (American managed care plans than traditional insurance (American Journal of Managed Care)Journal of Managed Care)

• Medicare women with breast cancer in HMO’s have their Medicare women with breast cancer in HMO’s have their cancer diagnosed at an earlier stage, and have better cancer diagnosed at an earlier stage, and have better outcomes than those in traditional Medicare (JAMA)outcomes than those in traditional Medicare (JAMA)

1616

Backlash!Backlash!

1717

Backlash!Backlash!

1818

Managed Care at the CrossroadsManaged Care at the Crossroads

Real managed care, as envisioned by Paul Ellwood or Alain Enthoven is incompatible with economic boom times with a tight labor market and a health insurance system whose policies are part of the labor contract

Uwe Reinhardt

Real managed care, as envisioned by Paul Ellwood or Alain Enthoven is incompatible with economic boom times with a tight labor market and a health insurance system whose policies are part of the labor contract

Uwe Reinhardt

1919

Why Healthcare Costs Rise – Piling OnWhy Healthcare Costs Rise – Piling On

EnhancedTechnologyEnhanced

Technology

PopulationAging

PopulationAging

Purchaser / Consumer Separation

Purchaser / Consumer Separation

Expectationof

Perfection

Expectationof

Perfection

$$

Class Action Lawsuits Against Managed Care and EmployersClass Action Lawsuits Against Managed Care and Employers

Broad Direct Marketing of Drugs and Technology

Broad Direct Marketing of Drugs and Technology

Human Resource Shortages of Key Healthcare ProfessionalsHuman Resource Shortages of Key Healthcare Professionals

$$

2020

Health Care Organizations:Caught in the MiddleHealth Care Organizations:Caught in the Middle

Historical Cost Increase Pressures

Historical Cost Increase Pressures

Extraordinary Cost Increase PressuresExtraordinary Cost Increase Pressures

“Balanced Budget”Medicare Impact

“Balanced Budget”Medicare Impact

Employer Cost Concerns

Employer Cost Concerns

2121

Acute Examples at Prestigious OrganizationsAcute Examples at Prestigious Organizations

• Harvard – Pilgrim Health PlanHarvard – Pilgrim Health Plan• Massachusetts General / Brigham and Women’sMassachusetts General / Brigham and Women’s• Stanford / University of California at San Stanford / University of California at San

FranciscoFrancisco• Henry Ford Health SystemHenry Ford Health System• SutterSutter• AllinaAllina• Allegheny HealthAllegheny Health• Catholic Healthcare WestCatholic Healthcare West

• Harvard – Pilgrim Health PlanHarvard – Pilgrim Health Plan• Massachusetts General / Brigham and Women’sMassachusetts General / Brigham and Women’s• Stanford / University of California at San Stanford / University of California at San

FranciscoFrancisco• Henry Ford Health SystemHenry Ford Health System• SutterSutter• AllinaAllina• Allegheny HealthAllegheny Health• Catholic Healthcare WestCatholic Healthcare West

2222

Status Quo Projections at IHCStatus Quo Projections at IHC

• Annual total volume growth (inpatient and outpatient Annual total volume growth (inpatient and outpatient services, driven by population growth and utilization services, driven by population growth and utilization changes): 2.8% per yearchanges): 2.8% per year

• Reimbursement increaseReimbursement increase• Medicare / Medicaid: 1%Medicare / Medicaid: 1%• All other: 3%All other: 3%

• Expense increaseExpense increase• Salaries, wages and benefits: 5%Salaries, wages and benefits: 5%• All other: 3%All other: 3%• Depreciation: 7%Depreciation: 7%

• No utilization, efficiency or other improvementsNo utilization, efficiency or other improvements

• Annual total volume growth (inpatient and outpatient Annual total volume growth (inpatient and outpatient services, driven by population growth and utilization services, driven by population growth and utilization changes): 2.8% per yearchanges): 2.8% per year

• Reimbursement increaseReimbursement increase• Medicare / Medicaid: 1%Medicare / Medicaid: 1%• All other: 3%All other: 3%

• Expense increaseExpense increase• Salaries, wages and benefits: 5%Salaries, wages and benefits: 5%• All other: 3%All other: 3%• Depreciation: 7%Depreciation: 7%

• No utilization, efficiency or other improvementsNo utilization, efficiency or other improvements

2323

Status Quo Projections at IHCRevenue and CostStatus Quo Projections at IHCRevenue and Cost

0

500

1000

1500

2000

2500

3000

3500

2000 2001 2002 2003 2004 2005 2006

Deductions

Depreciation

Interest

Other Exp

Salaries

Revenue

2424

Today’s Turbulence Is Likely to Catalyze New Insurance MechanismsToday’s Turbulence Is Likely to Catalyze New Insurance Mechanisms

• Purchasers (both government and commercial) are likely Purchasers (both government and commercial) are likely to respond to increasing costs by placing consumers in a to respond to increasing costs by placing consumers in a position of greater choice – but with more significant position of greater choice – but with more significant responsibility – than in the pastresponsibility – than in the past

• The most dramatic incarnation of such a philosophy with a The most dramatic incarnation of such a philosophy with a reasonable likelihood of implementation is employer-reasonable likelihood of implementation is employer-based defined-contributionbased defined-contribution

• In some ways, this is a non-government reincarnation of In some ways, this is a non-government reincarnation of “managed competition” as discussed in the early 1990s“managed competition” as discussed in the early 1990s

• As an alternative, national single-payer systems are again As an alternative, national single-payer systems are again under discussion, but are not likely in the near futureunder discussion, but are not likely in the near future

• Purchasers (both government and commercial) are likely Purchasers (both government and commercial) are likely to respond to increasing costs by placing consumers in a to respond to increasing costs by placing consumers in a position of greater choice – but with more significant position of greater choice – but with more significant responsibility – than in the pastresponsibility – than in the past

• The most dramatic incarnation of such a philosophy with a The most dramatic incarnation of such a philosophy with a reasonable likelihood of implementation is employer-reasonable likelihood of implementation is employer-based defined-contributionbased defined-contribution

• In some ways, this is a non-government reincarnation of In some ways, this is a non-government reincarnation of “managed competition” as discussed in the early 1990s“managed competition” as discussed in the early 1990s

• As an alternative, national single-payer systems are again As an alternative, national single-payer systems are again under discussion, but are not likely in the near futureunder discussion, but are not likely in the near future

2525

LinkageTo Market

HealthPlans

HealthPlansMedical Expense Stabilization – Input Costs:

Charge Per Case for Utah HospitalsMedical Expense Stabilization – Input Costs:Charge Per Case for Utah Hospitals

-50%-40%-30%-20%-10%

0%10%20%30%40%

0 5,000 10,000 15,000 20,000 25,000 30,000

Admits

Dev

iatio

n fr

om U

T A

vg

LDSLDS

UUUU

UVUVStMStM

McKMcK

CtWdCtWd

AFAF

ORMCORMC

DavDav

AVAVSLRSLR

MVMVLVLV

= Non IHC= Non IHC

= IHC= IHC

AP-DRG Adjusted Trended by Size (Admit Rate) - 1998AP-DRG Adjusted Trended by Size (Admit Rate) - 1998

2626

LinkageTo Market

HealthPlans

HealthPlans

Facilitate Medical Expense StabilizationFacilitate Medical Expense Stabilization

• Implement “indications for care” guidelines in all Implement “indications for care” guidelines in all clinical programsclinical programs

• Provide cost per case, cost per episode and cost Provide cost per case, cost per episode and cost PMPM incentives (depending on the clinical PMPM incentives (depending on the clinical program) for physiciansprogram) for physicians

• Develop product designs that place greater Develop product designs that place greater financial incentive for efficient care on the financial incentive for efficient care on the consumer – to avoid adversarial care management consumer – to avoid adversarial care management and prepare for defined contributionand prepare for defined contribution

• Implement “indications for care” guidelines in all Implement “indications for care” guidelines in all clinical programsclinical programs

• Provide cost per case, cost per episode and cost Provide cost per case, cost per episode and cost PMPM incentives (depending on the clinical PMPM incentives (depending on the clinical program) for physiciansprogram) for physicians

• Develop product designs that place greater Develop product designs that place greater financial incentive for efficient care on the financial incentive for efficient care on the consumer – to avoid adversarial care management consumer – to avoid adversarial care management and prepare for defined contributionand prepare for defined contribution

2727

Protocol for treatment of PneumoniaProtocol for treatment of Pneumonia

• 67 Different combinations of antibiotics67 Different combinations of antibiotics

• Protocol established best practiceProtocol established best practice

• Documented 25-47% improvement in mortalityDocumented 25-47% improvement in mortality

• 10% improvement in expense 10% improvement in expense

• 25% improvement in complications25% improvement in complications

• 67 Different combinations of antibiotics67 Different combinations of antibiotics

• Protocol established best practiceProtocol established best practice

• Documented 25-47% improvement in mortalityDocumented 25-47% improvement in mortality

• 10% improvement in expense 10% improvement in expense

• 25% improvement in complications25% improvement in complications

2828

LinkageTo Market

HealthPlans

HealthPlansFacilitate Medical Expense Stabilization

- Involve the Consumer FinanciallyFacilitate Medical Expense Stabilization- Involve the Consumer Financially

$$Health PlanHealth Plan PhysicianPhysician

ConsumerConsumer

THE ENDTHE END