Topics

1. Topics • Financing Complexity • Insurance • Public Financing for Healthcare • Payments and Reimbursements • Issues and Trends “Financing is the lifeblood of any health care delivery system. At a basic level, it determines who will pay for health care services for whom.” Text, p. 237

2. Financing Complexity • Healthcare Financing in the U.S. is distinguished by stunning complexity compared to other developed countries • A dizzying array of payers • Private insurance companies • Government agencies • Out of pocket

3. Financing Complexity (cont.) • A single provider billing for a single type of procedure may face • Different rates allowed by each of several payers • Still a different rate for uninsured patients • A different mix between patient and payer payment responsibility for the procedure • The possibility of multiple payers for the same patient and procedure • Different patient payments depending on deductibles, prior payments, and/or their insurance policy

4. Financing Complexity (cont.) • Some payers contract with other agencies to administer their programs • Piggyback on the administrator’s network of providers and administrative systems • Piggyback on the administrator’s office systems • Processing • Money management • Administration • Payment

5. Financing Complexity (cont.) • Three functions of HC Finance • Financing—providing the money • Insuring • Assuming the risk • Administering the programs • Paying—Paying providers • Service providers are the fourth element of the HC system, delivery • HMOs may integrate all four functions

6. Financing Healthcare • Most Americans receive healthcare paid by insurance • Private insurance • Medicare • Medicaid/SCHIP • Out of Pocket includes • Uninsured payments • Copays and deductibles for insured individuals

7. Financing Healthcare (cont.) • Payment for the insurance coverage comes from various sources • Employer health insurance: Employer and employee contributions • Private health insurance: The Insured pays all costs • Medicare: Medicare taxes + General taxes • Medicaid: General revenue taxes

8. Insurance • Insurance is a mechanism for protecting against risk • Insured persons face probabilities of bad things happening to them • Accident – Illness • Death – Fire • An adverse event has a financial cost • The expected value of the event is the probability of the event occurring times the cost of the event if it occurs

9. Insurance (cont.) • The total risk faced by an insured, i, is the sum of all risks for that person or company • The insured pays an amount covering risk plus overhead • Profit • Administrative costs • Marketing costs

10. Insurance (cont.) • Insurers calculated the expected risks and costs they will face for large groups of people and price policies accordingly • Revenues are the sum of all payments • Some insurers are able to invest retained premiums (not a big factor in health insurance) • If actual adverse event occurrences are higher than expected and/or actual costs of adverse events are higher than expected then profits are reduced

11. Insurance (cont.) • Insurers (cont.) • If actual occurrences and/or costs are lower than expected then profits are higher • Insurer profits = Premiums + investment income – loss payments – underwriting expenses • While the probability of an adverse event for any one person is tough to predict the probability over thousands of people is much more reliable • Insurers make money by pooling risk to stabilize their expected payouts

12. Insurance (cont.) • A “moral hazard” exists when • One party has private information about a transaction • The private information affects the value of the other party’s participation in the transaction

13. Insurance (cont.) • Moral Hazard (cont.) • If a person knows of a health condition that is more likely to lead to an expense (↑PEi) than for the ‘average’ person… • …And if the insurer is unaware of this risk • The person receives a discount on insurance • The insurer will pay more than expected in claims • We will see this concept in the pricing of different insurance products

14. Insurance (cont.) • Individual Private Insurance • Individuals purchase insurance on their own directly from an insurance company (or HMO) • This insurance is usually much more costly than group insurance (next slide) because there is a moral hazard component to the market • How does this hazard come about in this circumstance? • Many types of people use individual insurance • Self employed • Early retired • Unemployed • Employees with no plan

15. Insurance (cont.) • Group Insurance • Employer, Union, and Professional Organizations often constitute “Groups” which contract with an insurer for insurance • Typically, all members of the group must participate in the insurance program • Mandatory participation reduces moral hazard • Healthy and unhealthy employees (and family members) must participate • Healthy payments cover payments to unhealthy • The larger the group the more stable the costs

16. Insurance (cont.) • Group Insurance Tax Implications • Employer contribution is a tax deductable expense • (Most) benefits received by employees are not taxed as income • If employer gave contribution directly to the employee • Employee pays tax on the income • Pays higher rates for individual insurance • Employee contribution also “pre tax” • Employers becoming less generous as unemployment rates go up

17. Insurance (cont.) • Employer Self Insurance • Large enough employers can self insure • Bear the risk of payouts • Don’t have to pay insurance company profit or marketing costs (↓Oi) • Typically contract with a traditional insurer to administer the plan • Self insurance plans are also exempt from providing some mandatory coverages • 55% of covered employees were in self insured plans

18. Insurance (cont.) • Managed Care Plans • HMOs and PPOs group more of the functions of financing into a single organization • Insuring • Paying • Providing services • Employees in HMOs • Contracted providers in PPOs • Managed Care plans have more control over costs in the overall transaction

19. Insurance (cont.) • Cost Sharing spreads payment risk to insured • Deductable—amount insured must pay before benefits begin • Co-pay—amount insured must pay when services are rendered • Provider Payment = Co-pay + Insurance Pmnt

20. Insurance (cont.) • Personal Implications • The entire insurance function has extreme personal implications for you • You should always be aware of • What benefits, including covered services, co-pays, stop losses, etc., you have • What your options are if you lose your current coverage • How legislative or regulatory changes may affect you personally

21. Public Financing for Healthcare • Numerous public (government) health financing programs exist • Military, retired military, veterans, and military family coverage • Medicare and Medicaid (1965) • PACE (1997) • SCHIP (1997)

22. Medicare • Four types of coverage • Part A: Hospitalization • Part B: Non-hospital medical insurance • Voluntary • Mixed funding: Premiums + gov’t subsidy • Part C: Managed Care Programs for Medicare participants • Part D: Prescription coverage

23. Medicare (cont.) • Medicare Financing • Medicare Part A (and later Part C & D) have been funded by current workers for current eligibles • Excess contributions go into trust funds • Supposed to cover future needs, including the aging baby boomers • Projections call for depletion of the trust funds by 2018 (right when I need them)

24. Medicaid • Health services for the indigent • A “means-tested” program • Medicaid is administered by each state • Federal government contributes funds • Level of coverage varies from state to state • States provide additional funding • States set eligibility requirements • States set benefits coverage

25. Other Programs • PACE (Program of All-inclusive Care for the Elderly) • Combines Medicare and Medicaid coverage • No co-pays or deductibles • SCHIP (State Children’s Health Insurance Program) • Covers uninsured children • Less restrictive eligibility (higher income threshold) than Medicaid

26. Other Programs (cont.) • Military Health Services System • Many components • Mix of insurance and employed and contract providers • Available to active duty, dependents, and retired and retired dependents • Veterans Health Administration • Veterans with service-connected conditions (first priority) • Veterans with income limitations • Dependents of veterans killed on duty

27. Other Programs (cont.) • Indian Health Service • Clinics, public health, dental, and other services • Focus of services is near Native American populations

28. Payments and Reimbursements • Large payers and providers negotiate or set rates of reimbursement for services • There are different approaches to setting rates • Fee for service: Specific rates for a specific service • Providers have incentive to provide services • Neither provider nor insured patients pay the costs

29. Payments and Reimbursements (cont.) • Rate Setting (cont.) • Bundled Charges • Bundles related specific services into a bundle for a more general definition of the service • Sets rate for the bundled services • Specific patients use more or fewer specific services for the more generalized treatment • How does this approach shift incentives?

30. Payments and Reimbursements (cont.) • Rate Setting (cont.) • Resource-Based Value Scale • Specific treatments are categorized by • Time ‒ Effort • Expertise • A base cost factor is established • Varies geographically • Payments based on base cost factor x value • Only the base cost need be adjusted over time • Used for Medicare payments

31. Payments and Reimbursements (cont.) • Rate Setting (cont.) • Diagnosis-Related Groups • Each group is a diagnosis with an expected • Bundle of services that will be needed • Total cost • Rates are set for the diagnosis group • Adjustments made for • Geographic area • “Outlier” patients

32. Payments and Reimbursements (cont.) • Rate Setting (cont.) • Case-Mix Methods • Patient condition-based analysis determines expected expenditures • Patient condition places them into groups that are “uniform in their consumption of services” • Payment made on historical consumption by the group, not on specific uses of services by the patient

33. Issues and Trends • Pay For Performance • Healthcare financing is marked by a disconnect between three parties • Decision makers • Payers • Beneficiaries (consumers) • Theory predicts that healthcare will be over used (cost more) • In theory P4P attempts to induce decision makers to make more cost-effective decisions

34. Issues and Trends (cont.) • Insurance Continuity • An employee’s current insurance plan and the potential cost or loss of coverage for a new plan skew decision making • Job lock—staying with a job for the benefits even if it is not a good prospect • Impeding small business start-ups • COBRA and HIPAA provide for continuation of employer coverage at employee expense • Also prohibited preexisting condition exclusions • Provided some tax benefits

35. Issues and Trents (cont.) • Erosion of Private Insurance • Large numbers of individuals are uninsured or underinsured • Income levels where uninsured families exist are rising • Financial conditions affect gross figures • Employers not needing to be as competitive • Employers using more part-time employees (not eligible for benefits)

36. Issues and Trends (cont.) • Risk Selection • Insurers are able to treat individuals differently based on medical history • They can deny, reduce, or charge extra for coverage • Insurers would prefer nothing but healthy people in their risk pool • Everyone else faces high costs or no coverage

37. Issues and Trends (cont.) • Financing the Uninsured • Uninsured patients do receive healthcare • Use about half the healthcare of the insured • Are often unable to pay when they do receive treatment • Governments and hospitals must step in to pay • Providers (usually hospitals) must cover unreimbursed treatments by increasing costs to paying patients

38. Issues and Trends (cont.) • Fraud and Abuse • The sheer magnitude of the HC financing system makes fraudulent activity attractive • GAO estimated that 10% of health spending is fraudulent • Claims for nonexistent patients • Claims for procedures never rendered • “Upsizing” treatments • Enforcement resources are inadequate