YOU BELIEVE IN MAGIC OF YOU BELIEVE IN MATH

THE CHANGING ECONOMICS AND REGULATION OF HEALTH CARE

R. Lawrence Van Horn, Ph.D, MPH, MBAExecutive Director for Health Affairs

Associate Professor of Economics and ManagementAssociate Professor of Health Policy

Associate Professor of Law

Disclaimer

• The opinions expressed forthwith are my own and do not reflect the views of – My employer– The logically and mathematically

challenged.• Economics is focused on the

equilibrium – Not so good at timing and path to

the equilibrium.

Roadmap

• The macro math challenge – big picture

• Take-aways from health care reform– Macro business implications– Impact on economic growth

• What does the future look like?• What should you do about it?

A 45 YEAR PERSPECTIVE

A 45 years ago…..(the good ol’ days)Economic Tension existed.

1. When I was a kid my parents paid for my visits to the pediatrician out of pocket.

2. We had major medical which reimbursed my parents for 80% of the cost of hospital care.

3. Elderly lived with their families.4. As a population we were thinner.5. People took few prescription

drugs.

25 Years Ago( the great undoing)

1. Growing health care cost inflation

2. Growth of HMOs ruined price sensitivity

1. Comprehensive health benefit

2. Low cost sharing – copays

3. Acknowledgement that health care costs were a problem for individuals and companies.

Larry before he began Worrying about health care

Today• I spend less out of pocket to take

my kids to the pediatrician than my parents did 40 years ago.

• My grandma lives in a nursing home a state responsibility rather than my family

• I am a balding middle aged fat man with a BMI of 30.– I take 6 prescription drugs a day.– I struggle to make good decisions

Today - sadly

• I engage in health care transactions daily which are value destroying.

• I have little ownership over my health.

• My employer offers me $240 to fill out a health risk assessment hoping I will change my behavior.

ECONOMIC PICTURE

The financial picture of the Jones Family (husband / wife and 2 kids)

• Income $28,220 • Expenses $35,520

»Shortfall $7,300• Credit Card Balance

$175,400

• Needed for Retirement$540,000

But wait there is more ……

The financial picture of the Jones Family (husband / wife and 2 kids)

• Income $28,220 • Expenses $35,520

»Shortfall $7,300• Credit Card Balance

$175,400

• Needed for Retirement$540,000

But wait there is more ……

Now multiply by $100 million and you have our Federal Budget.

The Current Sad State of Affairs

2011

Why Debt Matters

• Debt beyond 90%-100% depresses economic growth (Reinhardt & Rogoff)

• All debt is not equal– Debt which results in future growth

– may be good– Debt to fund current consumption –

bad• We will hit a “bang point”

– Lenders stop lending– Financial manipulation won’t work

anymore

Problem with Interest

• Current debt is 37% higher than pre-crisis average.

• When the economy recovers and the government debt rolls over, that additional debt is going to increase government net interest payments by about 1.85 percent of GDP

• How much is 1.85% of GDP

1.85% of GDP is a LOT! (approx. $325B)

• Equivalent to spending this year on all military personnel (uniformed + civilian) + all science, space, and technology research + all spending on the environment, conservation, national parks, and natural resources + all spending on highways, airports, bridges, and all other transportation infrastructure.

Source: New York Times January 2012

Entitlement Program Participation 2013• 1.2M HUD households• 47.8M on SNAP (food stamps)

which increased by 1M last year.• 5.6M receiving unemployment

insurance for 99 weeks• 58M on Medicaid, 72.5M on

Medicaid at least 1 month• 50M on Medicare• 11-12M on permanent disability

Size of US military 1.5M

Source: New York Times January 2012

Nearly Half of All Americans Don’t Pay Income Taxes

The 20% impossibility proposition

You can’t get more than 20% of GDP through current tax system

Medicare Facts

• When Medicare was first established, we were told that it would cost about $12 billion a year by the time 1990 rolled around.  Instead, the federal government ended up spending $110 billion on the program in 1990, and the federal government spent approximately $600 billion on the program in 2013.

MEDICARE is everything!

• The Medicare trustees report states that we are currently 37 TRILLION dollars short on our current obligations.– Since 2001 Benefits have increased

by 23.5%• Add Medicaid and other

entitlements and we end up 54 TRILLION dollars short.

• To put this in perspective the US GDP is around 17 trillion.

Philosopher David Hume 1752• It must, indeed, be one of these two

events; either the nation must destroy public credit, or public credit will destroy the nation.

• It is certain, that national debts cause a mighty confluence of people and riches to the capital, making the head too large for the body.

Money flowing to the greater DC area

Median Income

County Rank

Median Income

County Rank

% Change

Arlington County Virginia 137,216$ 1 74,924$ 8 83%Loudoun County Virginia 127,192$ 2 80,648$ 3 58%Howard County Maryland 108,844$ 3 74,167$ 10 47%Fairfax County Virginia 107,096$ 4 81,050$ 2 32%

Williamson County Tennessee 90,759$ 16 69,104$ 20 31%

source: American county survey prepared by US Census Bureau

2012 2000Wealthiest Counties in the United States

• 30 former staffers have moved to K street• Former Rep. Earl Pomeroy (D-N.D.) joined Alston & Bird in

2011 after dealing with healthcare and tax issues as a member of the House Ways and Means Committee.

Former senior counsel to HHS Secretary Kathleen Sebelius Dora Hughes became a senior policy adviser at the law firm Sidley Austin last year. 

The Disconnect

The biggest problem - Cultural

• We feel comfortable consuming healthcare and miraculously having “insurance” [other people’s money] pay for it.

• We don’t value much of what we consume in excess of the cost.– Consider the well child visit.

• We don’t feel comfortable making cost part of the conversation around tradeoffs.– If we increase quality cost will

magically drop.

How much did you pay in Medicare?• Assume somebody turns 65 and

becomes eligible for Medicare this year.– Started paying in 1969.

• Based on a median wage earner contributing for 42 years:– Only Payroll Tax $55,428– With Income Tax $118,705

• If invested? $224,955– Expected benefit $259,174

$140,469 Unfunded

$1.4B / day

$511B / year

Number needed to pay– my dear mom

• Knee Replacement

• Cost $20,000• Aetna Medicare

Advantage Cost to mom = $0, $45/ visit

Number of Median worker’s total Medicare payroll deductions required to pay for my mom’s knee? PRICELESS? NO – 20 Median working American’s entire Medicare payroll tax deduction necessary to fund.

Summary• Public Payors will not be able to

sustain current level of expenditures.– Short-run - Pay less for services– Longer term: Buy different set of

services• Society wide economic

headwinds are significant and likely will persist for decades.– It will be difficult / impossible to

grow our way out of this imbalance.

HEALTH CARE REFORM

The Problem – the Uninsured

• About 45 – 47 million uninsured– 11 million have income below the

poverty line.– 12 million have incomes in excess of

300% of the FPL ($66,000).– 5 million have incomes in excess of

500% of the FPL ( $110,000)– 10 million are not US citizens.– 25% are eligible for Medicaid but

haven’t signed up.Source: http://aspe.hhs.gov/health/Reports/05/uninsured-cps/index.htm

High level – Health Reform

• Juices the demand side– Expected 32M more customers

• Currently looking like 11M– Enhanced expectations – free prevention– Subsidized insurance through exchange for up to

65% of population (400% FPL)• Relies on silver bullets on supply side for fix

– ACOs– Value Based Payment– Bundled Payment– Patient Centered Medical Homes (PCMH)

Feb 2, 2014• "At the beginning of this year, we noted that as part of this new day in health care, Americans would no longer be trapped in a job just to provide coverage for their families, and would have the opportunity to pursue their dreams," he said. "This CBO report bears that out, and the Republican plan to repeal the ACA would strip those hard-working Americans of that opportunity."

American Action Forum – Doug Holtz Eakin Feb 2014

Expectation: 2.7M / 39%

WE NEED TO DO BUSINESS DIFFERENTLY – THE HOPE!

An innovation example – Arvind Eye

• Arvind physician performs 2000 surgeries per year compared with US surgeon of 400.

• Production line approach• Lenses were an input cost

problem at $150 a piece. Arvind created Aurolab and manufactured themselves at a cost of $2-$4 a piece.

THE ANSWER WILL BE DRIVEN BY THE CUSTOMER.

Demand Side evolution

• We cannot continue to have patients / citizenry with unrealistic expectations, no price sensitivity, and no ownership.– Unlimited demand in the face of

constrained supply.• We will continue to see shift (to

the extent legal) toward defined contribution and higher patient cost sharing. Having significant impact on the demand for health care services

MY CRYSTAL BALL

Medium term (1-3 years)

• Continued shift towards greater patient cost sharing (CDHP).

• Provider top line revenue will continue to come under pressure.

• Provider bad debt shifts from uncompensated care to insured but patients won’t pay.

• Patients with increased out of pocket expense will pull back on demand and look for cheaper alternatives.

Longer term (4-10 years)• Delivery system recognizes it can’t make

people be healthy who don’t care.– Individual underwriting becomes standard.

• Employer health benefits become defined contribution (like retirement) rather than defined benefit.

• ACA collapses unwinds under its own economic weight

• Your adult children move back in with you.

End Game• Public safety net gov’t insurer

covers limited scope of services that can be supplied with available tax funding.

• Delivery system reorganizes around public and private providers.

• The US delivery and financing system looks like all other developed countries.

• Your children care for you in your old age.

Recap1. Hanging with Larry makes us sad.2. Hospital source of bad debt shifts3. Continued shift to hospital employed physicians4. Focus has to be on taking down the cost structure5. Service quality will be key6. We need an order of magnitude improvement in

productivity.7. Increased patient financial responsibility will

change locus of care– Innovation in how to deliver care will be rewarded.

Upheaval and change creates opportunities