Health Care Economics and Why it
Matters
Paying for Medical Care
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Pre-WW II
 Mostly Private Pay
 Some Employer Provided - Kaiser
 The Blues
WW II
 Price Controls
 Health Insurance As Benefit
Post WW II
 Private Insurance
 The Blues
 Medicare/Medicaid
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The Blues
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Blue Cross
 Hospital insurance
Blue Shield
 Physician insurance
Historically controlled by the providers
 Paid what was charged
 Subsidized the rural areas and care of the poor
 Subsidized over-bedding and over treatment
Nobody cared until the 1970s
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Social Security Income and Disability
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1930s
 Lifted the elderly out of poverty
 Retirement age was older than life expectancy
 Why does this matter a lot?
1956 Amendments - Provided disability insurance
 Big and valuable program and pays for a lot of medical
care - 7.5M people
 Gamed a lot and manipulated both ways by Congress
 (reference)
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Hill-Burton
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Post-WWII
Funded construction of community hospitals
Had community service requirements, but those
have all expired
Created the US emphasis on hospital based care
Spent from the 1970s to the 1990s reducing
hospital beds to control costs
Excess beds or Surge Capacity?
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The Great Society- 1964
Inventing the Modern Elderly
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Medicare
 Old People
 Certain disabled people
Medicaid
 Poor People
 Nursing Homes - old/disabled
 About 40% of federal medical dollars
Politics
 Fought by the AMA
 Made Docs Rich
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The Federal Role
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Feds Pay About 45% of Health Care
 Medicare, Medicaid, TriCare, VA System
 Other Plans Follow the Feds
Usual and Customary Charges for Docs
 Based on the Community
 Adjusted for the Docs Previous Charges
 Complex
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What do We Spend?
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Total health care spending
Medicare 2008 Factsheet
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Implications of Spending for Torts
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Hospitals
 Single biggest component
 In the tort world, remember Willie Sutton
Outpatient Surgery Centers, Specialty Hospitals, and Imaging Centers
 Increasingly capturing revenue from hospitals
 Doc run - lots of conflicts of interest
 Good future in med mal
Pharm and Medical Devices
 Growing share of the market
 Best tort target
Physicians
 Specialists who do procedures
 Primary care
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Perverse Incentives
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The #1 corrupting incentive in health care is that insurers pay for doing stuff and
giving drugs, not for thinking and talking to patients.
 Only thing new is the amount of money at stake
Hospitals
 Longer stays, more intense treatment, attempts to keep the dead warm
 For many years, hospitals did not even know what things cost, they just
charged what they needed to make money
 Nonprofit and forprofit are about the same
Drug and Device Companies
 Bribe docs to over prescribe and use inappropriate but expensive drugs and
devices
Docs
 Unnecessary procedures/Feel good drugs/Get a piece of the action on tests
 Federal law prevents kickbacks and fraud - not a tort, but interesting.
All of these depend on the myth that more care is good care
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Changing the Game for Hospitals
Diagnosis Related Groups - DRGs - 1983
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Watershed in Health Care Reimbursement
 Prospective Payment (Capitation)
 Based on Admitting Diagnosis
 Fixed Payment
 Some Adjustments
Encouraged health insurers to also manage physician
care
Only apply to Medicare, but influence other insurance
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Making Money Under DRGs
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Fewer Tests and Procedures
 Complete Reversal of Prior Reimbursement
 No Bump for ICU
Reduce Length of Stay
 Dropped About 20% at Once, continued to drop
 Ideal Is Out the Door, Dead or Alive
 Patients Discharged Much Sicker
Which Was Right, Then or Now?
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Controlling Docs - Laws Enabling
Managed Care
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Federal HMO Act in the 1970s
 Preempted State Laws Banning Prepaid Care
ERISA
 Passed to allow labor unions to negotiate national
health plans with big employers
 Preempts state regulation of certain self-insured
health plans
 Gave self-insured plans an edge and drove most
employers to them
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Managed Care Organizations - MCOs
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Insurance Plans That Control Patient Care
Includes the Old Alphabet Soup
 HMOs
 PPOs
 IPAs
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Two Major Variables
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Employer or Contractor
 Do the docs work for the plan or a captive group?
 Do the docs contract with many plans, treating
patients based on different plan benefits?
Open or Closed
 Do the docs treat only patients from a single plan or a
mix of plans?
Why do these matter?
 Leverage on the doc's decisions
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Direct Controls on Costs by the Plan
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Pay Less for Services
 Use Market Power to Bargain
 Control Access Points
 Limit Hospital Stays
 Limit Tests, Procedures, and Referrals
Direct Control of Access
 Pre-approval
 Tell the Docs What to Do
 Most Honest
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Indirect Controls
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Capitation
 CRF--Consultation and Referral Funds
 Withhold and Incentive Pools
 Stop-loss and Reinsurance
 Total Capitation
Economic Credentialing
Dumb Down Services
Free Ride on Other Plans or the Government
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Current State of Doc Control by Insurers
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Managed care backed off direct control
More emphasis on just paying less
Providers and businesses that do procedures, run labs,
or sell drugs and devices use their money as political
power to protect their income
 #1 cost problem
 Rich docs are not automatically better docs
Primary care has seen its pay cut in real terms over the
past 20 years
Cannot even attract US trained docs to primary care
residencies in many places
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What do We Get for Our Money?
U.S. Has A Lower Life Expectancy than
Most Other Industrialized Countries
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Taken as a major criticism of the US system
Is life expectancy really the right measure?
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Life Expectancy Is Not Health
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Bias
 Weighted Toward the Young
 One Baby Is Worth Several Grannies
Only Life Counts
 Discounts Quality of Life
 Nursing Home Is As Good As the Ski Slopes
 Masks Aging Population
 Masks Improved Health
A Good Measure for Developing Countries
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What Complicates Health in the US?
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We Have 3rd World Public Health
 Ineffective Prenatal Care
 Poor Immunization Practices
 Limited Access to preventive and routine care
Teen Pregnancy
 Prematurity
 Poor Parenting
Developed World Leader in AIDS
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Non-medical Issues
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The Problem of the Poor
 Poor Education
 Poor Health Habits
 Cannot Afford Prevention
Geography
 Too Many Isolated Areas
 Expensive to Deliver Care
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How has the Health Care Umbrella been
Expanded?
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Sin to Sickness
 Alcoholism
 Drug Abuse
Miscatagorization
 Nursing Homes - housing?
 Vanity Surgery - life style?
Should Compare Total Social Welfare Budget with Europe
 General social welfare spending is much higher in
Europe
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The Core Problem
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Public health and primary care does not work well
 Chronic diseases can be mitigated, but not cured or
prevented
 Shifts care to expensive technology and drugs
Emphasis on drugs also makes us a drug-ridden society
 DARE as a joke
 How do tell a kid that Adderal is good and meth is
bad?
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Impact of Governmental and Private Plan
Economics and Special Interests on Care
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High tech care has the strongest interest groups
 Providers and suppliers have a lot of money
 Patient advocacy groups are easy to capture
 Captures every more of the budget
Primary care, prevention, and public health
 Not sexy
 Big savings are low tech, long term
 Not a good news story
 Providers do not have the money to lobby
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Patient Directed Care Example
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Patients will spend their own money and will thus make
better decisions
 What is their knowledge base?
 Can you really learn what you need on the WWW?
How will this play out for preventive care?
What is the incentive for providers?
 Feel good drugs?
 Antibiotics?
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Why it will Get Worse:
Second Order Demographics
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People live longer because of medical care and
public health
 More old people
 More people with chronic illness do not die
 Old people need more
 Total cost goes up
Health is much more expensive than death
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The Real Third Rail: Retirement Age
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What are current implications of a system
designed for people to retire at 65 when the
average life expectancy was about 60?
What should retirement age be?
How does increasing the retirement age help pay
for health care?
How would this change society?
What about the
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Health Care Reform
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Who will lose?
Who will win?
How will we pay for expanding access?
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