Economic Relationships in
Health Care
Peter Farrow
– CEO & General Manager –
Overview
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•
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Characteristics of a Free Market
Health Care vs. Health Insurance
Does Price Sensitivity Exist?
Health Care Reform and the Future
Characteristics of a
Free Market
• Driven by Supply and Demand
• Allocates resources based on a
price mechanism
• Requires full information and
freedom of choice
Health Care vs.
Health Insurance
• Health Care
– Little price sensitivity
– Little information for decision making
– Loose exchange transaction between
end consumer (patient) and supplier
(clinician)
Health Care vs.
Health Insurance (cont’d)
• Health Insurance (Group)
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–
–
–
Near commodity
High price sensitivity
Easy comparisons of products
Low barrier to switch or substitute
• Health Insurance Not Just
Intermediary
– Real Purpose is to pool risk to indemnify
from catastrophic loss
Typical Market
Exchange
Services
Provider
Patient
(Supplier)
(Consumer)
Payment
Health Care/
Insurance Exchange
Insurer
Payment
Payment
Service
Authorization
Service
Request
Patient
Provider
(Supplier)
Services
(Consumer)
What’s Missing in
Health Care?
• Adam Smith’s theory of “the invisible hand” self-interest (profit motive) guides the most
efficient use of resources in a nation's economy.
• Detachment of trade (payment for goods)
eliminates the self-interest. Consumers have
“already paid for health care” through insurance,
so they have no self-interest to conserve.
Providers have low risk in losing “customers,”
because they are not directly paying for
services.
Managed Care – Market
Based Regulation?
• As third party in transaction, managed care
techniques were an attempt to provide “regulation”
to an exchange uncontrolled by economic interests.
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−
−
−
−
Prior Authorization
Utilization Review
Limited Networks
Case Management
Cost Sharing
• “Self-interest” appeared in managed care, forcing
backlash and easing of techniques used to bring
efficiency to transaction. Change was, in part, cause
of another spike in health care costs.
What Should Health Care
Market Look Like?
Services
Provider
Patient
(Supplier)
(Consumer)
Payment
Payor needs to function as surrogate, or
representative, of one or the other.
Is There Hope?
• Does Any Price Sensitivity Exist in Current
Health Care Economy?
– Employers and Members increasing cost sharing
(copays and deductibles)
– Employers pushing Health Savings Accounts
– Wellness programs becoming more popular
• People realizing that improved health will lower health
care costs
– Hospitals report 5+% decrease in revenue during
recession.
Analogy to
Current Situation
• Early 1970s - Low prices for gasoline:
– Large cars
– Little conservation
– No attention to mileage
History of Gasoline Prices
What Happened When Gas
Prices Spiked?
•
Mid to Late 1970s
– Demand for smaller cars
– Mileage becomes important
– Car-pooling and other conservation techniques become
popular
– Summary – When prices increased enough, consumers
changed habits significantly
•
Today
– Higher mileage (conservation)
– Alternative fuel development (substitution)
Percentage of Household
Expenditures for Health Care
7.0%
6.0%
1917-1919
1950
5.0%
1960-1961
1972-1973
4.0%
1986-1987
3.0%
2005
2011
2.0%
1.0%
0.0%
1917-1919
1950
1960-1961
1972-1973
1986-1987
2005
2011
All households – Bureau of Labor Statistics
“Health Care, Health Insurance and the Distribution of American Incomes” 2009
Health Care Reform
• Positives:
– Reduces level of uninsured
– Largely maintains employer-based system
– No new government-run plan
– Expands access to coverage
– Maintains state regulation under federal
framework
– Should create some parity in costs through
subsidies
Health Care Reform (cont’d)
• Challenges
– Does not address increasing health care costs.
– Does not aggressively address quality.
– Includes a variety of new taxes.
– Significant federal control.
– Too focused on who pays and not enough on
what we are paying for.
– Individual premiums increased by well over
20%, just because of reforms.
“Health Care, Health Insurance and the Distribution of American Incomes” 2009
“Health Care, Health Insurance and the Distribution of American Incomes” 2009
Misleading Rhetoric
• “Medicare administrative costs are cheaper
than insurance companies.”
• Medicare doesn’t have many costs that
health insurers have, such as sales costs,
appropriate level of fraud prevention,
disease management, nurse lines,
compliance reporting, taxes, etc.
How Do We Control Costs?
• Bring consumer into the equation more.
– Index pricing
– Transparency in medical pricing
• Increase role of wellness and health
promotion.
– Increase engagement
– Re-educate people on lifestyle and diet
• Payers need to function more as “buyers” for
consumers – to represent consumers.
What Should Health Care
Reform Look Like?
• Focus on what is provided in care:
– Is it necessary?
– Is it high quality?
– Is it cost effective?
• Ensure that patients receive “the right care
at the right place at the right time.”
(Institute of Medicine)
• Create incentives to drive quality and
preventive care, not just procedures.
Create Better Market Forces
Are We Getting
Effective Care?
The First National Report Card on
Quality of Health Care in America,
Rand Corp. 2006
Does Coverage Matter?
The First National Report Card on
Quality of Health Care in America,
Rand Corp. 2006
Recommended Reading
• Redefining Health Care – Michael
Porter
• The History of Health Care Costs and
Health Insurance – A Wisconsin Primer
• Wisconsin Policy Research Institute
• www.wpri.org
• Crossing the Quality Chasm: A New
Health System for the 21st Century –
Institute of Medicine
The significant problems we face cannot be
solved at the same level of thinking we were
at when we created them.
- Albert Einstein
Questions?
Thank You!