Introduction to Health Care Finance

Outline

• How much do we spend on health care?

• Who pays for health care?• What are the different types of

health insurance?• How do physicians receive

compensation via the different forms of payment?

National Health Expenditures per Capita, 1990-2018

Source: Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group, at http://www.cms.hhs.gov/NationalHealthExpendData/ (Historical data from NHE summary including share of GDP, CY 1960-2007, file nhegdp07.zip; Projected data from NHE Projections 2008-2018, Forecast summary and selected tables, file proj2008.pdf).

$8,160(2009)

$13,100(2018)

$2,814(1990)

Actual Projected

31.5%

20.0%9.7%

5.5%

2.8%14.8%

15.6% Hospital Care,$850.6

Physician & ClinicalServices,$541.4

PrescriptionDrugs,$263.0

Other Health Spending,

$421.4

Other PersonalHealth Care,

$400.7Home Health Care,

$74.3

Nursing Care Facilities & Continuing Care Re-tirement Communi-

ties,$149.3

NOTE: Other Personal Health Care includes, for example, dental and other professional health services, durable medical equipment, etc. Other Health Spending includes, for example, administration and net cost of private health insurance, public health activity, research, and structures and equipment, etc.

SOURCE: Kaiser Family Foundation calculations using NHE data from Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group, at http://www.cms.hhs.gov/NationalHealthExpendData/ (see Historical; National Health Expenditures by type of service and source of funds, CY 1960-2011; file nhe2011.zip).

Distribution of National Health Expenditures, by Type of Service (in Billions), 2011

NHE Total Expenditures: $2,700.7 billion

Factors Accounting For Growth In Per Capita National Health Expenditures And Personal Health Care Expenditures, Selected Calendar Years 2004–11.

Hartman M et al. Health Aff 2013;32:87-99

©2013 by Project HOPE - The People-to-People Health Foundation, Inc.

2006

Wages

Other Fringe Benefits and Payroll Taxes

Private Group Health Insurance

45.6%

56.3% of GDP

Cumulative Increases in Health Insurance Premiums, Workers’ Contributions to Premiums,

Inflation, and Workers’ Earnings, 1999-2012

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

38%

109%

172%

38%

113%

180%

11%

29%

47%

8%

24%

38%

Health Insurance PremiumsWorkers' Contribution to Pre-miumsWorkers' EarningsOverall Inflation

SOURCE: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-2012. Bureau of Labor Statistics, Consumer Price Index, U.S. City Average of Annual Inflation (April to April), 1999-2012; Bureau of Labor Statistics, Seasonally Adjusted Data from the Current Employment Statistics Survey, 1999-2012 (April to April).

Source: Stan Dorn, Bowen Garrett, John Holahan, and Aimee Williams, Medicaid, SCHIP and Economic Downturn: Policy Challenges and Policy Responses, prepared for the Kaiser Commission on Medicaid and the Uninsured, April 2008

Impact of Unemployment Growth on Medicaid and SCHIP and the Number Uninsured

1%

Increase in National Unemployment

Rate

=1.0 1.1

Increase in Medicaid

and SCHIP Enrollment

(million)

Increase in Uninsured(million)

&$2.0

$1.4

$3.4

Increase in Medicaid and

SCHIP Spending(billion)

State

Federal

Putting Off Care Because of Cost

6%

17%

22%

26%

30%

34%

34%

53%

Relied on home remedies or over the counter drugs instead of seeing a

doctor

Skipped dental care or checkups

Put off or postponed getting health care you needed

Skipped recommended medical test or treatment

Not filled a prescription for a medicine

In the past 12 months, have you or another family member living in your household… because of the COST, or not?

Did ANY of the above

Percent saying “yes”

Cut pills in half or skipped doses of medicine

Had problems getting mental health care

Source: Kaiser Family Foundation Health Tracking Poll (conducted November 5-12, 2009)

Why is it important?US compared to OECD countries

• Health expenditures grew rapidly between 1960-1980 for most countries.

• Rates continued to rise into the 1990s-2000s in US.

• The US is the biggest spender in terms of GDP for health care. Spends twice as much as the UK (national health insurance).

Who Pays for Health Care?• Private Insurance

– Employer Based– Direct Purchase

• Government Insurance– Medicare– Medicaid– Military– Other (SCHIP and TANF)

• You – out of pocket expenses

Simple Organizational ChartHow Do Dollars Flow?

Federal Programs

• Medicare– 100% federal pay– run by the feds– elderly, disabled people under Supplemental Security

Income (SSI)• Medicaid

– 1/3-1/2 cost share by the states– run by states– poor people, often old, nursing homes, disable– falls apart when folks need it most

• Military health programs– Getting to be big dollars, usually left off the graph

Types of Medicare• Part A

– is the part of Medicare coverage that covers major illnesses and end-of-life care issues. This may include services such as inpatient hospital care and hospice care.

• Part B– is a type of Medicare that covers

normal doctor's visits and other minor issues

• Part C• Part D

Medicare Part C

Medicare Part C

• (AKA Medicare Advantage Plan or Medicare Choice)

• Helps people afford private insurance

• will completely replace both Medicare Part A and Part B.

• It may also require an additional premium payment.

Medicare Part D

• to subsidize the costs of prescription drugs for Medicare beneficiaries in the United States.

• It was enacted as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA)

• Effective date: January 1, 2006.

Key features

From: Peter Orszag - Director CBO

Medicare Spending as a Share of Total Federal Outlays, FY2010

Medicaid and SCHIP

8%Other16%

Nondefense Discretionary

19%

Defense Discretionary

19%

Social Security20%

Medicare13%

Net Interest5%

SOURCE: OMB, Fiscal Year 2010 Budget, February 2009. Budget Summary by Category.

2010 Total Outlays = $3.5 trillion

Private InsuranceTypes of Private Insurance

• EPO (HMO) a managed health care unit• High premiums, low deductible and/or co-

payments• Limits choices, but also limits cost

• PPO• Low premiums, high deductible and/or

co-payments• Offers more choice

• Health Savings Account (HSA)• Provides a tax-shelter to self insurer.

Why do we need Insurance?

What is insurance?

• Consider a club• 100 members• About the same age, about the same lifestyles• About once a year one of the members gets

sick and incurs expenses of $1,000. • Club collects $10 from each member each

year. • Invests it somewhere to maintain or increase

its value.• Pays it out to members who file claims.

What has happened?

• Insured pay $10 per year, guaranteed, to avoid the possibility of having to pay $1,000.

• Although outlays for an individual may be highly variable,

• Outlays for a group are generally rather predictable.

• The “Law of Large Numbers” suggests that as group size increases, the distribution of the average rate of illness will collapse around the “true” probability of the illness.

Insurance Terms• Moral Hazard

– occurs when a party insulated from risk may behave differently than it would behave if it were fully exposed to the risk.

– Typically occurs after you have insurance• Adverse Selection

– Lemons problem– It refers to a market process in which "bad" results

occur when buyers and sellers have asymmetric information (i.e. access to different information): the "bad" products or customers are more likely to be selected.

– Typically occurs before you have insurance

Insurance Terms

• Premium - $X premium for $Y of coverage.• Coinsurance and Copayment - The insured

person must pay the loss. – % paid is the coinsurance rate (varies from 0 to

100%).– amount paid is the copayment.

• Deductible - Some amount may be deducted from the payment to the insured person, irrespective of coinsurance.

• Why coinsurance and deductibles? Discuss.

Let’s Review Coinsurance

• Suppose a visit costs $20.

• BUT, insurance pays 50%.

Visits

Mon

ey P

rice

Effective P

rice

40

30

20

10 10

20

30

40

Money price demand

Effective demand

What Does Moral Hazard Do?

• It makes us spend too much on medical care.

Quantity

Pric

e

Demand

Q1

P1

Exp.

• At P1, we buy Q1 and spend E1.• With insurance, we pay LESS than

full price, so we buy Q2, spend E2. This is P1 (Q2 - Q1) more than we spent before.

• Why is it too much?

Demand w/ insurance

Q2

What Does Moral Hazard Do?

• Why is it too much? We paid P1 (Q2 - Q1) more.

Quantity

Pric

e

Demand

Q1

P1

Exp.

• The demand curve tells us what the care is worth to us. So the additional (Q2 - Q1) is worth:

Demand w/ insurance

Q2

Value

• The “wasted” expenditures are:

Wasted

For the Entire Economy it’s WORSE

• Why is it too much? We paid P1 (Q2 - Q1) more.

Quantity

Pric

e

Demand

Q1

P1

Exp.

• The demand curve tells us what the care is worth to us. So the additional (Q2 - Q1) is worth:

Demand w/ insurance

Q2

• The “wasted” expenditures are:

Wasted

SupplyValue

Risk and Insurance

• What is “expected value?”• What’s the expected value of a coin flip that pays

$1 for heads and 0 for tails.• A> Probability of heads * $1 + Probability of tails *

0.• E = 0.5 * 1 + 0.5 * $0 = $0.5

• How much would you pay to play this kind of game?

• Why do we care?• A> Because insurance is based on expected losses!

Anatomy of an Insurance Premium

• The amount paid for insurance can be separated into two parts.

• Actuarially fair premium• Loading fee

Premium Expected Cost

Loading Fee

Loading Fee

• Administration Costs• Legal Fees• Profits• 10 – 15% of a premium

Why do I need to know all of this insurance stuff?

• You will most likely work in one of two environments– “Fee-for-Service”

• There is a menu of services and each service has a price.

– “Capitation”• Physicians offer a bundle of services at

one flat price per patient.

Financial Risk Arrayed on a Spectrum from Full Risk for the Insurer to Full Risk for the

Provider

Fee for Service vs. Capitation

• VS

Fee for Service• Advantage

– No risk associated with cost– You are encouraged to see many

patients and perform many services• Disadvantage

– You have “no skin” in the medical options therefore you tend to over-supply and run up health care cost

• Bundle Payment – See the ACA

Capitation

• Capitation - Physician receives a fixed payment per person in return for providing medical services regardless of the quantity of medical care delivered.

• e.g. A physician may receive $9 per member per month for each enrollee who chooses an HMO plan and elects him to be their primary care caregiver.

Capitation

– Physician has an incentive to restrict # of patient visits.

– Problem - Physician can reduce visits by referring patients to other providers in the same HMO plan.• e.g. If the patient has high blood

pressure, refer her to a cardiologist.

– Solution - Withholding

Advantages of Capitation

• Increased clinical autonomy Physician financially responsible for cost

overrunsEliminates need for external review

• Increased income Physician compensated by risk pools

created from withholds if can reduce utilization of hospital, outpatient, diagnostics, other ancillary services

Healthcare Reform Bill

• http://youtu.be/3-Ilc5xK2_E

Questions About the ACA

• Are the health exchange open to everyone?– No, only to those not receiving health

insurance from their employer• Will I receive a subsidy to buy

health insurance?– If you're an individual making up to

$45,950, you should be eligible for at least a bit of a subsidy.

Questions About the ACA

• What are the employer penalties– $2,000 excluding the first 30

employees, but the average family cost of insurance for an employer is $11,429

Questions About the ACA

• What is the individual penalty?• In 2014, the annual penalty will be $95 per

adult and $47.50 per child, up to a family maximum of $285 or 1 percent of family income, whichever is greater.

• In 2015, the penalty will be $325 per adult and $162.50 per child, up to a family maximum of $975 or 2 percent of family income, whichever is greater.

• In 2016, the penalty will be $695 per adult and $347.50 per child, up to a family maximum of $2,085 or 2.5 percent of family income, whichever is greater.

Per Capita Annual Health Care Spending Of Respondents To The Medical Expenditure Panel Survey, 2000–09, By Care Setting And Nativity And Legal Status.

Stimpson J P et al. Health Aff doi:10.1377/hlthaff.2013.0113

©2013 by Project HOPE - The People-to-People Health Foundation, Inc.

How Not to Become Dr. Cox

1. Be a Doctor because you want it! Not your parents, not your friends, not because society may think it is good.

2. Always be nice to others: especially nurses, therapists, secretaries, etc . . They will save you one day or throw you under the bus.