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Chapter 6 Financing Health Care and Economic Issues


Chapter 6 Financing Health Care and Economic Issues History of Health Care Financing Underlying themes driving health care financing in the United States for the past ... – PowerPoint PPT presentation

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Title: Chapter 6 Financing Health Care and Economic Issues

Chapter 6Financing Health Care and Economic
History of Health Care Financing
  • Underlying themes driving health care financing
    in the United States for the past two decades
  • Physicians had the dominant role in health care
  • Physicians controlled all access to health care
  • Tests or procedures were provided if the
    physician determined that any marginal benefit
    might be obtained
  • Objective was to provide the best possible care
    to everyone
  • The sophistication of medical technology rapidly

History of Health Care Financing
  • Fee-for-service payment method and economic
    incentives contributed to increased costs
  • The more tests or procedures performed the
    greater the physicians earnings because earnings
    were tied to procedures
  • Economic incentives to provide as much care as
  • Patients were insulated from costs because
    insurance was paying the bill

History of Health Care Financing
  • Lack of cost-consciousness contributed to
    increased costs
  • Patients were not aware of costs
  • Providers had little incentive to be concerned
    about costs
  • Providers received more income for using more
  • Providers had no financial risk for using
    additional resources

History of Health Care Financing
  • Medicare expenditures increased rapidly
  • The program was implemented in 1965 with a
    fee-for-service payment mechanism
  • Rapid growth of expenditures became a major
    factor in the federal budget deficit
  • Aging population retired no longer contributes to
    Social Security Fund

History of Health Care Financing
  • Health care financing revolution
  • Initiated in 1983 when Medicare moved to a
    prospective payment system based on
    diagnosis-related groups (DRG)
  • Medicare limited its total payment to the
    hospital to an amount preestablished for the
    patients specific DRG
  • Shift was critical for hospitals since Medicare
    was the largest single payer of hospital charges

Coping measures Employed to Beat the New System
  • Materials and drugs mark up
  • Difference in payment for out patient procedures
    vs in patient procedures
  • EX PCI on a 2359 hold vs admission for 24 hours

History of Medical Care Financing
  • Once the reimbursement revolution began, private
    insurance companies initiated similar
    reimbursement arrangements
  • Medicare extended the financing revolution to
    physician reimbursement in the early 1990s and
    initiated the resource based relative value scale
  • RBRVS brought physician reimbursement more in
    line with skills required and actual time spent
    on procedures

History of Medical Care Financing
  • Managed care
  • Encompasses several different approaches
  • Health maintenance organizations (HMOs)
  • Preferred provider organizations (PPOs)
  • The insurance company, a peer review
    organization, or another review mechanism
    evaluates the patients medical options and
    brings cost consciousness to bear on medical
    decision making
  • Has slowed the rate of growth of health care

History of Medical Care Financing
  • Rapid expansion of managed care is a response to
    numerous factors
  • Cost inflation
  • Overuse of medical care and resources
  • Increased number of uninsured people
  • Effects of employers health costs on business
  • International competitiveness

History of Medical Care Financing
  • Inflation and cost containment
  • Health care costs increased more rapidly than
    prices of most other goods and services from the
    mid-1970s through the 1980s
  • Measures taken in recent years by insurers,
    payers, providers, and consumers have helped to
    slow health care inflation

History of Health Care Financing
  • The largest share of health expenditure is for
    hospital-based care, which has achieved reduced
  • DRGs led to decreases in hospital admission rates
    and patients average length of stay patients
    are being discharged from hospitals quicker and
    sicker use of home health and primary care
    clinics have increased
  • Hospitals are using cost-cutting techniques such
    as decreasing inventories, joining purchasing
    groups, and using physician review

History of Health Care Financing
  • Drug companies have been forced to limit price
    hikes generic products are often prescribed
  • New cost containment and utilization control
    strategies under managed care as well as cost
    sharing by patients have helped slow inflation

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  • The Health Care Financing Administration (HCFA)
    was created as a principal operating component of
    the Department by the Secretary on March 8, 1977,
    to combine under one administration the oversight
    of the Medicare program, the Federal portion of
    the Medicaid program, and related quality
    assurance activities. Today, HCFA serves 67
    million people, or one in four elderly, disabled,
    and poor Americans through Medicare and Medicaid.
    In fiscal year 1993, HCFA will spend an estimated
    230 billion to provide health care services.

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CPT - Current Procedure Technology
  • CPT Codes describe medical or psychiatric
    procedures performed by physicians and other
    health providers. The codes were developed by the
    Health Care Financing Administration (HCFA) to
    assist in the assignment of reimbursement amounts
    to providers by Medicare carriers. A growing
    number of managed care and other insurance
    companies, however, base their reimbursements on
    the values established by HCFA. Since the early
    1970s, HCFA has asked the American Medical
    Association (AMA) to work with physicians of
    every specialty to determine appropriate
    definitions for the codes and to try to determine
    accurate reimbursement amounts for each code. Two
    committees within AMA work on these issues the
    CPT Committee, which updates the definitions of
    the codes, and the RUC (Relative Value Update
    Committee), which recommends reimbursement values
    to HCFA based on data collected by medical
    societies on the going rate of services described
    in the codes.

History of Health Care Financing
  • Access Issues
  • Predominant health care issue for the 1990s
  • Lack of access to health care is primarily lack
    of health insurance
  • In 2002 fifteen percent of people in United
    States were uninsured - 43 million people
  • Underinsured and uninsured generate uncompensated
    care and bad debt for health care providers,
    who must then increase charges to paying
    customers (households and public and private
    insurers) in a process known as cost shifting

  • U.S. VERSUS U.K.
  • Private Healthcare VERSUS Universal Healthcare
  • Maslows hierarchy of motivation.

May 10, 2006
  • Last week, in his New York Times column , Paul
    Krugman wrote about a study from the Journal of
    the American Medical Association , and the study
    is fascinating enough that its worth a second
    look. It was conducted by a group of
    epidemiologists at University College London (my
    parents alma mater!). The point was to compare
    the health of the United States and the United
    Kingdom. Its an interesting question for a
    number of reasons, but principally because the
    United States spends 5274 per person, per year,
    on health care and the United Kingdom spends
    2164, or substantially less than half as much.
    The question iswhat do we get, in terms of
    health, that for extra 3100 a year?

May 10, 2006
  • Comparisons between countries are pretty tricky.
    So the study takes a number of precautions.
    Obviously the United States has a much larger
    percentage of immigrants, particularly Latino,
    and black population. So the comparison is
    limited to non-Hispanic whites in both countries.
    Health also differs, dramatically, by
    socio-economic status, so that everyone in the
    study was broken up into one of three groups by
    income and education. It was also limited to men
    and women between the ages of 55-64, and the age
    distribution of the two countries was identical.
  • So what do they find?

May 10, 2006
  • The first conclusion is that Americans are
    really, really sick compared to the British. In
    every socio-economic group, for instance, the
    prevalence of diabetes is roughly double in the
    United States than it is in the United Kingdom.
    Rates of hypertension, heart disease, heart
    attacks, stroke, lung disease and cancer are also
    all higher in the United States. And not just a
    little big higher. Much higher. So, for example,
    2.3 percent of the English have had a stroke,
    versus 3.8 percent of the Americans.
  • Is that because Americans have unhealthier
    lifestyles? Not really. Levels of smoking, in the
    two countries, are pretty similar. Americans are
    much more likely to be obese (31.3 versus 23
    percent). But then 30 percent of the British were
    heavy drinkers, versus 14.4 percent of Americans.
    (One of the curious facts in the study  in both
    the United States and the United Kingdom, the
    more money you make and the more education you
    have, the more you drink. There are roughly twice
    as many heavy drinkers in the best educated
    English cohort as there are in the least educated
    English cohort. So much for class assumptions
    about alcohol.) The studys author did a
    statistical exercise, where they assumed that the
    British group had exactly the same lifestyle risk
    factors as their American counterparts. The
    result? Nothing much changes. Americans were
    still far sicker than the British. 

May 10, 2006
  • Krugman argues that this is evidence of how much
    more stressful living in America is than living
    in England. I think that's absolutely right. I
    would simply add that it is one more nail in the
    coffin of the notion that good health is
    something that can be purchased through fancy,
    high-tech drugs and doctors and hospitals,.I know
    the idea that health care is just another
    consumer good is pretty popular at the moment.
    But its very hard to read the JAMA study, see
    what our 5274 actually buys us--and still
    believe in that notion. Our health is in reality
    a function of the broader society in which we
    live--the pressures and conditions and
    environments in which we find ourselves. The next
    time we have a debate about, say, how much to tax
    the rich, or how to structure old age pensions,
    it would be nice if someone in Washington had the
    courage to make this point.

History of Health Care Financing
  • The poor are more likely to lack a usual source
    of care, less likely to use preventive services,
    and more likely to be hospitalized for avoidable
    conditions than those who are not poor
  • Uncompensated care and cost-shifting are primary
    reasons some groups advocate for national health
  • Other health barriers to health care access
  • Location or geographic problems of access
  • Long waiting times to obtain health care
    resulting in lost wages if patients have to miss
  • Scarce resources in obtaining organs for

Allocation of Health Care Resources
  • Health Resources
  • Labor or inputs devoted to producing health
  • Nurses, physicians, pharmacists, technicians, and
  • Education and training for labor
  • Capital including all medical facilities and
    equipment available
  • Land including the actual land area for
    hospitals and other facilities
  • Entrepreneurship encompasses skills and
    risk-taking that business-persons bring to health
    care organizations

Allocation of Health Care Resources
  • Resource allocation questions
  • What combination of medical goods and other goods
    and services in the United States do we want to
  • What type of health and medical care do we want
    to produce?
  • High-tech institutional-based mix of health
    services emphasizing crisis oriented medical
  • Prevention-oriented system emphasizing primary
    care and wellness?
  • Who should receive health care goods and
  • Should all citizens have financial access to
    health care?
  • National health expenditures predicted to double
    by 2010

Economic Approaches to Allocating Health Care
  • Regulated market system
  • Market system implies private ownership of
    resources and private decision making by
    consumers about their purchases and by businesses
    about producing and selling
  • U.S. health care system is a regulated market
    system because almost every area is regulated
  • Examples of regulation
  • Requirements of minimum nurse staffing of
    hospitals, particularly in ICU, CCU, or maternity
  • Laws regarding disposal of medical waste products
  • Regulations affecting the conduct of medical labs

Economic Approaches to Allocating Health Care
  • Competitive Market System
  • Decisions in a competitive market system are
    generally based on the prices of goods and
  • U.S. health care system is not really competitive
    for several reasons
  • Consumers cannot be informed about what health
    care to purchase without a diagnosis from a
  • Difficult to get information about prices of
  • Physicians may be in charge of decision making
    about what services the patient needs
  • Physician's reimbursement incentives may
    encourage over-or underutilization of services

Economic Approaches to Allocating Health Care
  • Consumers often pay less than full price because
    the health insurance may pay part or all of the
  • With health insurance the consumer may perceive
    health care as cheaper than it is and is
    motivated to over consume
  • The noncompetitive U.S. health care system is an
    important determinant in the increase in managed
  • Job Growth and the Health Care Industry

Sources of Health Care Financing
  • Private insurance
  • Pays two-thirds of privately financed health care
  • Increasingly following Medicares lead in
    changing payment mechanisms to include HMOs and
  • HMOs
  • May have capitation payments or fee-for-service
    payments to providers reduce costs by
    restraining use
  • PPOs
  • Based on contractual arrangements between the
    insurer and provider insurer gives lower prices
    and the insurer motivates insurees to use that
    facility or physician group

Sources of Health Care Financing
  • Tax subsidies of private payments
  • Government subsidizes private sources of health
    expenditures if they represent tax deductions and
    nontaxible income
  • Cities subsidize health care real estate through
    property tax exemptions for nonprofit and public

Sources of Health Care Financing
  • Public insurance
  • Government is the biggest influence in the health
    insurance market generating 50 of hospital
    revenues and 25 of physician incomes
  • Medicare covers approximately 13 of the U.S.
  • Medicaid covers approximately 10 of the
  • Impacts of payment modes
  • Increased the efficiency of the delivery of care
  • Influenced provider behavior, emphasizing the
    importance of economic incentives to shift toward
    cost-effective methods of care

Implications for Nursing Managing Cost
Effective, High Quality Care
  • Efficiency and effectiveness of care
  • Nurses can impact care delivery through the
    nursing process, case management, utilization
    management, and education
  • Nurses will be most successful when they can
    demonstrate care with measurable, effective
  • Coordinated care
  • Case management
  • Disease management
  • Outcome management

Implications for Nursing Managing Cost
Effective, High Quality Care
  • Nurses role in managing care
  • Support and provide cost-effective care for
    wellness, acute care, and chronic illness
  • Provide health education to improve health,
    practice prevention, and manage chronic
  • Manage health care services for optimal resource
    management with high-quality outcomes at
    reasonable costs

Implications for Nursing Managing Cost
Effective, High Quality Care
  • Trends affecting the future of health care
  • Efficiency and effectiveness through coordinated
  • Population diversity and aging
  • Expansion of technology
  • Consumer empowerment

Implications for Nursing Managing Cost
Effective, High Quality Care
  • Population diversity and aging
  • Growing elderly population translates to an
    increase of health care expenditures consumed by
    older adults as chronic illnesses increase
  • Nurses can implement disease management programs
    and participate in care management in long-term
    care settings
  • Cultural diversity will bring new cultural
    practices and disease patterns with economic and
    care implications new labor force to health care

Implications for Nursing Managing Cost
Effective, High Quality Care
  • Expansion of technology
  • Technology is under examination for cost
    efficiency versus outcome delivery
  • Nurses will play a key role in educating patients
    and families about the cost-to-benefit ratio and
    will assist in selecting alternatives
  • Technology of the Internet offers promise for
    innovative programs
  • Nurses can combine clinical skills with
    information technology skills to meet a critical
    need for health information and data management

Implications for Nursing Managing Cost
Effective, High Quality Care
  • Consumer empowerment
  • Customers or patients as health care consumers
    are demanding quality services at affordable
  • Nurses must understand and provide
    customer-focused care
  • New relationships with consumers are developing
    that emphasize cost sharing based on individual
    health practices

Implications for Nursing Managing Cost
Effective, High Quality Care
  • Legislation is in place to protect individuals
    enrolled in managed care plans access, quality,
  • Nurses can take the lead in demonstrating the
    value of wellness and teaching health

Informed Consumer-Caveat Emptor
  • The premise is that medical spending will slow
    only if the demand for health services becomes
    more price elasticthat is, if consumers become
    price sensitive.
  • Two Options are now popular
  • Employers will contribute a defined amount of
    money for health insurance benefits and permit
    their employees to select the health plan (and
    benefits and cost-sharing) they want from a set
    of choices. This assumes that meaningful
    information about the quality of the alternative
    health plans can be developed and provided to
  • People will choose a high-deductible insurance
    plan and a health savings account (HSA)as now
    permitted by the Medicare Modernization Act of
    2003and then decide for themselves when to use
    the HSA funds. This asks consumers to take more
    responsibility for choices related to their
    medical care.

Expecting Reduced Use of Some Medical Care
  • Requiring consumers to pay for all medical costs
    below a deductible surely will cause demand for
    some medical care services to decline. The most
    likely categories are visits to physicians,
    prescription drugs, diagnostic preventative
    visits, and some discretionary outpatient
    surgeries. So far, so good. However, when
    evidence indicates that certain diagnostic
    screening tests or preventative well-person
    visits are cost-effective, it is penny-wise and
    pound-foolish to maintain incentives for people
    to reduce their use of these services.
  • The big spenders are the 10 of the population
    responsible for 70 of total U.S. health care
    spending each year. Putting people at risk for
    expenses below high deductibles ranging from
    2,000 to 5,000 is not likely to have any impact
    on the spending of people who are in the top 10
    (or even 20)unless it affects their decisions
    to seek preventative care in the first place.
    Even then, however, a medical condition serious
    enough to push someone into the top 10 of health
    care spenders likely will drive a person to seek
    medical care eventually, regardless of the

The Be-Careful-What-You-Wish-For Scenario
  • Proponents of consumer-driven, high-deductible
    health plans believe that when people have to pay
    the costs of services up to a deductible, they
    will demand less care. But this assumption
    ignores some significant changes occurring in
    medicine today, as well as the ease with which
    people obtain information from web sites. One
    such change in medicine relates to diagnostic
    imaging. Spending on radiological testing is now
    growing as fast as spending for prescription
    drugs in many large health plans. Diagnostic
    imaging is a fabulous tool not only does it
    increase physicians' ability to ferret out the
    cause of a problem, but it also enables many
    people to avoid invasive surgery. However, it is
    a double-edged sword. Often, the imaging turns up
    anomalies that are unrelated to the initial
    problem. This leads to repeated tests or
    sometimes surgery to determine the nature of the
    anomalyand this is adding to health spending.

Disparities in Health Care Access and Outcomes
Will Increase
  • Dot-com web sites and other web-based sources of
    information are generally seen as the primary
    sources of information for people to learn about
    options for treating conditions or diseases. This
    may make sense for the quarter of the population
    that is computer-savvy and already more likely to
    question physicians. The assumption that people
    will be able to use and understand web-based
    information is disingenuous, however, when it
    comes to the rest of the population. There are
    literally thousands of web sites related to
    medical issues. Many are highly technical and
    difficult to comprehend. How a highly educated
    consumer is to make a judgment about the benefits
    of even one recommended treatment option is not
    clearand the situation is far worse for the half
    of the population with reading levels below
    seventh grade.

Slowdown in Health Care Spending Needed
  • Since the vast majority of health care spending
    goes for a tenth of us, a much greater gain may
    be found in refocusing on the health problems
    that cause such high expenditures. Being
    overweight or obese, for example, greatly
    increases a person's chances of developing
    diabetes, which in turn raises the odds for
    stroke, kidney problems, vision loss, and
    circulatory problems in general. All of these
    contribute to high spending. Community or
    statewide efforts to publicize the dangers and
    costs of such problemsakin to what has been done
    over the past 40 years to reduce smoking, and has
    been supported by insurers, employers, and
    governmentsmight do more, at less cost, to
    reduce avoidable medical spending

Participating Consumer
  • The campaign will include online and
    person-to-person outreach to gather Californians
    healthcare stories and concerns, satellite-linked
    town halls across the state to learn about the
    issues and proposed solutions, house parties to
    bring neighbors, friends and
  • families together to discuss the problems with
    our healthcare system, and many opportunities for
    individual Californians to communicate to our
    elected leaders.The groups have come together
    around specific goals, and support and oppose
  • and proposals that are currently a part of the
    health reform debate. Those goals are listed on
    the website.
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