Medicare, Cost Shifting and Universal Coverage:The Economic Unraveling of U.S. Health Care

RAM/AMA -- VCU School of Medicine

March 2008

Rick Mayes

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OVERVIEW

This presentation examines:

1. major economic trends in U.S. health care system

2. The phenomena known as cost shifting and provider segmentation, the “medical arms race” they are fueling, and the implications for doctors, hospitals, and patients.

3. growing concerns and potential reforms

3Source: OECD Data 2007

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BACKGROUNDSince 2000 . . .

health insurance premiums have increased more than 78%

(versus 18% in general inflation and avg. wage growth)

- avg. cost of single coverage ($4,500 annually in 2007)

- avg. cost of family coverage ($12,000 annually in 2007)

The percent of companies offering health insurance to their workers has fallen from 69% in 2000 to approx. 58% in 2007

(6 million working Americans have lost their coverage since 2000)

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Health Insurance Premiums & Declining Coverage

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Consequences: Care Postponed & Never Received

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Extreme Consequences: Bankruptcy & Earlier Death• 50% of uninsured patients have debts from previous medical

care; a 1/3rd are being pursued by collection agencies

* Uninsured women with breast cancer are twice as likely to die as women with breast cancer who have health insurance.

(Kaiser Commission, 2002)

• Men without health insurance are nearly 50% more likely to be diagnosed with colon cancer at a later, more dangerous stage than men with insurance.

(Kaiser Commission, 2002)

* Upwards of 750,000 families are bankrupted by medical debt each year, even though 80% of them have some form of health insurance; single largest cause of bankruptcy (Health Affairs, 2005).

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Arnold and Sharen Dorsett with their children, Dakota, Zachery and Jessica, back. Though they had insurance, health-care costs for Zachery led the Dorsetts to file for bankruptcy this year.

Nicole Bengiveno/The New York Times

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Four Key Facts about U.S. Health Care1. 16% of the U.S. population is uninsured (huge financial drain on state

governments and medical providers, as well as a major cause of immense human suffering and decreased economic productivity)

2. Each year, approximately 20% of the insured and uninsured populations in the U.S. drive roughly 80% of all health care spending and consumption.

3. Health care involves high “fixed” costs (buildings, equipment, salaried personnel, overhead) and low “marginal” or variable costs (Rx drugs, food, paper, gloves, gowns, tests). example: an MRI

4. There are several “payers” (Medicare, Medicaid, employers, health insurers, individuals) but only one set of medical “providers” (doctors, hospitals, nurses, etc.), which fuels financial gamesmanship by health insurers and providers.

Cost-Shifting Hydraulic for Doctors & Hospitals

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%

120%

130%

Cost

10 80 907060504030200 100

Below Cost PayersAbove Cost Payers

Pay

men

t-to

-Cos

t R

atio

Percentage of Market Share

B = C + MarginContribution

Margin

Cost Shift

Shortfall

A

B

C

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Physicians & Cost-Shifting (or “Differential Pricing”)Relative Payment Level by Payer for Nine Common ED Codes

1.00

0.49

1.97 1.95

1.31

0.83

0.0

0.5

1.0

1.5

2.0

2.5

Medicare Medicaid FFS PPO HMO Worker'sCompensation

Pay

men

t-to

-Cos

t Rat

io

Source: The Lewin Group, “The American College of Emergency Physicians (ACEP) Practice Expense Study,” for the American College of Emergency Physicians.

18Source: The Lewin Group analysis of data contained in AHA TrendWatch Chartbook: Trends Affecting Hospitals and Health Systems.

The correlation coefficient betweenPrivate Payer Payment-to-Cost Ratio andMedicare, Medicaid & Uncompensated Care cost shift burden is 0.75

0%

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

Pri

vate

Pay

er P

aym

ent-

to-C

ost

Rat

io

Community Hospitals & the Role of Cost-Shifting

19Source: American Hospital Association’s Annual Survey of Hospitals (n=6,800 hospitals), 2006. Pearson’s correlation coefficients:

1984-1997: Medicare and Private ratios: r = -.86 1980-2004: Medicare and Private ratios: r = -.79 1984-1997: Medicaid and Private ratios: r = -.39 1980-2004: Medicaid and Private ratios: r = -.64

Hospital Payment-to-Cost Ratio by Payer, 1981-2005

91%93%

88%

83%

91%

87%

114%116%

128%

Medicare

96%

88%

92%

101%

99%

102%

Medicaid

97%95%

93%

76%

89%

Private

131%

122%124%

116%

127%

70%

80%

90%

100%

110%

120%

130%

140%

81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 2000 2001 2002 2003 2004 2005

Year

Rat

io (

in p

erce

nt)

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Growing Concerns• The ultimate cost shift: employers passing on a

larger and larger share of their increased health care costs to their employees in the form of higher monthly wage deductions and/or increased co-payments, deductibles, and out-of-pocket costs (especially for employees’ dependents).

• Beyond this strategy, more and more employers have simply stopped offering health insurance (16% of the U.S. population is uninsured; 46 million individuals or the aggregate population of 24 states, 2005)

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Economic Incentives & Health Care• The segmentation and migration of medical

care to non-hospital settings:- free standing diagnostic imaging centers- ambulatory surgery centers (ASC’s)- physicians’ concierge medical practices

• Health Savings Accounts (HSA’s) and the decline of risk-pooling provided by group health insurance

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Migration of Medical Care Provision is IncreasingNumber of Independent Diagnostic Testing Facilities, 2000-2006

1,7842,012

2,4032,618

2,944 3,0123,233

2,655

3,197

3,615

4,107

4,593

5,0115,385

0

1,000

2,000

3,000

4,000

5,000

6,000

2000 2001 2002 2003 2004 2005 2006

Year

Entities

Locations

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Outpatient surgery is also rapidly migrating to non-hospital settings…

Physician Offices

Freestanding

Facilities

Hospital-based Facilities

Source: Verispan’s Diagnostic Imaging Center Profiling Solution, 2004. *2005 values are estimates.

Percent of Outpatient Surgeries by Facility Type, 1981-2005

0%

20%

40%

60%

80%

100%

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005*

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…as the number of ambulatory surgery centers (ASC’s) has increased rapidly.

24622644

27863028

33713597

38874136

0

1000

2000

3000

4000

5000

1997 1998 1999 2000 2001 2002 2003 2004

Source: MedPAC, A Data Book: Healthcare Spending and the Medicare Program, June 2005

Number of Medicare-approved ASCs, 1997-2004

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Other2%

All Physician43%

Physician & Corporation11%

Physician, Hospital & Corporation10%

Physician & Hospital19%

All Hospital15%

…and 83 percent of ASCs are wholly- or partly-owned by physicians.

Source: American Association of Ambulatory Surgery Centers. ASC Ownership Survey. February 2004.

Ownership Structures of ASCs, 2004

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Self-referral has been linked to

increased utilization of diagnostic services… Number of Imaging Services Ordered per Physician-owner vs. Non-owner

2

76

4 4

8

5

13

11

89

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MRI CT Ultrasound Echocardiography Nuclear Medicine Complex X-ray

Non-owner Physicians Physician-owners

Source: United States Government Accountability Office, Medicare Referrals to Physician Owned Imaging Facilities Warrant HCFA’s Scrutiny, GAO/HEHS-95-2, Oct. 1994.

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…and financial incentives influence where physician-owners direct and treat patients.

Hos

pit

al O

utp

atie

nt

Su

rger

y C

ases

0

20

40

60

80

100

10/95 1/96 7/96 1/97 7/97 1/98 7/98

1st full month of ASC operation

Orthopedic Surgeries Performed by Physician-owners at a Full-service Community Hospital Before and After Ambulatory Surgery Center Opening, October 1995 - September 1998

Source: Lynk WJ and Longley CS. (2002). “The Effect of Physician-owned Surgicenters on Hospital Outpatient Surgery.” Health Affairs 21: 218.

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POLICY implications of the significant rise in physician-owned, for-profit: ambulatory surgery centers, specialty hospitals & diagnostic imaging centers:

1.) prospects for improved quality, lower costs, and more professional autonomy

- 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)

- exacerbates the development of multi-tiered health care (e.g., elite, average, poor)

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Segmentation of U.S. Health Care System Increasing: Concierge Medicine

Patients like Ilse Kaplan, left, receive more personal attention from Dr. Bernard Kaminetsky in exchange for an annual fee of about $2,000.

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Woo B. N Engl J Med 2006;355:864-866

Median Compensation for Selected Medical Specialties

31Bodenheimer T. N Engl J Med 2006;355:861-864

Family Medicine Residency Positions and Number Filled by U.S. Medical School Graduates

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Bodenheimer T. N Engl J Med 2006;355:861-864

Proportions of Third-Year Internal Medical Residents Choosing Careers as Generalists, Subspecialists, and Hospitalists

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Woo B. N Engl J Med 2006;355:864-866

Percent Change between 1998 and 2006 in the Percentage of U.S. Medical School Graduates Filling Residency Positions in Various Specialties

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Segmentation of U.S. Health Care System Increasing: HSA’s

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Moral Hazard: term used to describe the paradoxical fact that insurance can change behavior of the person insured.

example: employer-provided “donut” insurance (e.g., 5 cent co-pay)

avg. annual amount spent on medical care (by uninsured person) = $934

avg. annual amount spent on medical care (by insured person) = $2,347

Conclusion I: co-pays, deductibles, utilization reviews make patients use

health care more “efficiently” (frugally, wisely, sparingly)

Conclusion II: instead of expanding group health insurance, reduce it

The “Moral Hazard” Argument Against Expanding Health Insurance Coverage

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The “Moral Hazard” Argument Against Expanding Health Insurance Coverage

Fallacy I: Moral-hazard argument only makes sense if we consume health care in the same way we consume donuts (or car repairs or consumer goods).

Fallacy II: Having to pay for your own care does not automatically make ALL of your health care consumption more “efficient.” How could it?

example: wife’s appt. with dermatologist

Reality: cost-sharing is a very BLUNT instrument

example: RAND Corporation’s “Health Insurance Experiment” (1971-86)

BOTTOM-LINE: health insurance is moving in the “actuarial” direction (similar to car insurance) and away from the “social insurance” model with enormous consequences…

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Two Exit Questions to Think AboutWhat do providers have to do when every payer only

wants to pay the marginal cost?

Ultimately, who is responsible for the common good (i.e., graduate medical education, charity care, medical research) in a competitive market?