Nicholas C' Petris Center on Healthcare Markets

1
Nicholas C. Petris Center on Healthcare Markets
Consumer WelfareCost Shifting and
Universal Coverage

• M-3 Workshop
• Medical College of Virginia (MCV)
• Richmond, Virginia -- 2004
• Rick Mayes, Ph.D.
• Assistant Professor of Public Policy, University
  of Richmond
• Research Fellow, The Petris Center on HealthCare
  Markets Consumer Welfare
• School of Public Health, University of California
  Berkeley

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Three Guiding Questions

• Part 1 Why is the U.S. the only major western
  nation without universal health insurance
  coverage (15.6 of the population is uninsured
  45 million people or the aggregate population of
  24 U.S. states)?
• Part 2 Why did we ever get managed care (e.g.,
  HMOs) when doctors, hospitals, and patients
  despise it and love fee-for-service insurance?
• Part 3 How does the American health care system
  manage to survive, even though 45 million people
  are uninsured?

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The Uninsured in the United States

• 1990s unlike virtually all other socioeconomic
  indicators
• working- and middle-class phenomenon
• 20 million Americans who earn between 25,000
  and 75,000 are uninsured
• 30 of the working-/middle-class is uninsured
• (2004, U.S. Census Bureau)
• 15 million Americans buy their coverage in the
  individual health insurance market (rather than
  the group market) and the number is rising
  rapidly you better hope you never have to do
  this!

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The Uninsured in the United States
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The Uninsured in the United States

• the leading cause of personal bankruptcy
  (approximately 596,198 individual families and
  individuals declared bankruptcy due to lack of
  health insurance, insufficient health insurance,
  and/or substantial medical bills 2002)
• 8.5 million or 12 of all children are uninsured
  estimated to rise by another 900,000 by 2006
• (GAO, White House Report, 2002)

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Part 1 Why No Universal Coverage?

• Possible explanations
• -- universal coverage is too expensive
• -- American welfare policy is too stingy
• -- traditional opposition by medical providers,
  particularly physicians (the AMA)

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Alternative Political Economy Explanation

• Critical Junctures/Tipping Points
• Increasing Returns
• Path Dependency

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Critical Junctures/Tipping Points

• rare, largely unpredictable, and hugely
  consequential for what comes after
• e.g., QWERTY keyboard, VHS/Betamax, Apples/PCs,
  health epidemics, illegal music downloading
• mathematical illustration (e.g., BINGO
  raffle-basket)
• personal examples (e.g., college major, marriage)

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Increasing Returns

• Each subsequent step after a critical juncture
  reinforces the initial event/decision due in part
  to large set-up or fixed costs
• e.g., frequent flier-programs, public policies
  in general, and especially entitlement programs
• Momentum builds due to learning effects,
  decreasing marginal costs and increasing benefits
  for continuing down the existing path.
• increasing penalties and costs for exiting from
  the current path

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Path Dependency

• The benefits of sticking with a particular
  program or arrangement increase to the point that
  they outweigh any dramatic departure (e.g.,
  senior professors and technology)
• In effect, path dependency is the end product of
  policymakers having strong incentives to focus
  on a single alternative, and to continue moving
  down a specific path once initial steps are taken
  in that direction.

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Critical Juncture and Increasing Returns

• Social Security, 1935 old-age insurance and
  unemployment insurance in, health insurance
  out
• NLRB ruling in 1948 regarding health insurance as
  a fringe benefit of employment and labor unions
  decision in 1949with the defeat of President
  Trumans National Health Insurance planto pursue
  health insurance through the private route of
  collective bargaining
• famous GM-UAW 1948 contract

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Health Insurances Critical Juncture Increasing
Returns
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One Problem With Employer-Provided Health
Insurance

• Private, employer-provided health insurance
  creates gaps
• Answer build on the existing public social
  insurance program, Social Security
• Medicare/Medicaid, 1965
• Still took the death of a President, a landslide
  Democratic victory in 1964, and a financial
  deal with hospitals and doctors to pass Medicare.

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One Problem With Medicare Cost
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Path Dependency the U.S. Health Care System

• Clintons health reform effort in 1993-94 showed
  how entrenched our patchwork system of health
  care is.
• The proposal, and alternatives in Congress,
  overly threatened existing health insurance
  arrangements of the 85 of the population covered
  for the goal of covering the remaining 15 of the
  population who were uninsured.
• None of them ever even came close to be voting on
  on either floor of Congress.
• Only 2 options large tax increase or employer
  mandate

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Part 2 Why Did We Ever Get Managed Care?
andPart 3 How Does Our Health Care System
Survive?

• Answer largely because of extensive
  cost-shifting (or cross-subsidization of costs
  among different types of payers) by
• medical providers
• has always existed to varying degrees (like any
  service industry e.g., airlines, higher
  education unlike McDonalds)

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Hospital Cost Shifting Hydraulic"
B C MarginContribution
130
B
120
Cost Shift
C
A
110
Cost
100
Shortfall
Margin
90
80
70
Payment to Cost Ratio
60
Below Cost Payers
Above Cost Payers
50
40
30
20
10
10
80
90
70
60
50
40
30
20
0
100
Percentage of Market Share
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When Did Cost Shifting Take Off?

• Epochal change to Medicare in 1983 led to rapid
  increase in the utilization and extent of cost
  shifting in the late 1980s/early 1990s.
• Prospective Payment and 467 Diagnosis-Related
  Groups (DRGs)

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Hospitals Profit Initially But Then Congress
Source ProPAC, Medicare and the American Health
Care System, Report to the Congress (Washington
June 1995 and 1996), 55 and 68, respectively.
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Hospitals and Cost Shifting

• Cost Shifting (or Cross-Subsidization or Price
  Discrimination) is particularly attractive when
  60-80 of hospitals total costs are fixed (e.g.,
  MRI scan) and roughly 50 of hospitals revenues
  come from Medicare Medicaid.
• (e.g., cutting costs at colleges/universities)
• Definition of Cost Shifting When changes in
  administered prices of one payer lead to
  compensating changes in prices charged to other
  payers for care. Paul Ginsburg, former Chair of
  the Physician Payment Review Commission (PPRC)

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Hospitals Turn to Cost Shifting Private Gains
Public Losses, 1980-92 Source ProPAC, Medicare
and the American Health Care System, Report to
the Congress (Washington 1994), 29.
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Interview With Former ProPAC Chair, Stuart Altman

• Altman There is absolutely no question about
  it hospitals cost-shift. The not-for-profit
  hospitals are dominated by people whose view of
  life and hospitals is this they first look at
  what their costs are and then they look at where
  they are going to get the revenue from to pay
  those costs. They dont look at maximizing
  revenue or profits first. They look at their
  costs first. And their job as hospital
  administrators is to generate the revenue to
  equal those costs.
•  
• Mayes Its not to decrease costs?
•  
• Altman Absolutely not! It is NOT to decrease
  costs. You lose your job if you decrease costs.
  Youre going to piss somebody off, some doctor
  group, or patients. Youre going to lose your
  prestige in the community, because you dont have
  something a piece of medical equipment, a
  particular medical specialist, whatever it might
  be. I mean, lowering costs is not on any
  not-for-profit administrators agenda. They only
  lower costs when they cant find the revenue.
  Its the same thing at a university. Which
  president of a university or a dean gets credit
  for whacking faculty salaries or for cutting the
  size of the faculty or whatever. I was a dean
  and you dont win games with that. The only way
  you can afford to cut costs is if the market or
  the legislature wont give you the necessary
  revenue. And hospitals are the same way.

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Cost Shifting Passed Along to Insurers/EmployersP
ercentage Increase in Fee-for-Service Insurance
Premiums, 1984-89
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Employers Respond to Cost ShiftingSource
Employee Benefit Research Institute, Sources of
Health Insurance (Washington, February 1995).
25
Managed Care Worked for a While at Saving
Average Annual Rate of Increase in All Health
Insurance Premiums, 1989-2003
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Public Policy Implications

• Cost shifting is what enables many medical
  providers to cover their charity care and
  under-reimbursed costs.
• Cost shifting implicitly taxes the premium
  rates of insured individuals. This tax may
  price some small business purchasers out of the
  insurance market altogether.
• This cost shifting tax varies dramatically
  state by state.

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For Community Hospitals, as the Cost Shift Burden
Increases the Private Payment-to-Cost Ratio
Increases, 2001
Source The Lewin Group analysis of data
contained in AHA TrendWatch Chartbook Trends
Affecting Hospitals and Health Systems,
2001.Includes data for hospitals that reported
data in the AHA Annual Hospital Survey.
28
Aggregate Hospital Payment-to-Cost Ratiosfor
Private Payers, Medicare and Medicaid(1980
2001)
Private Payer
Medicare
Medicaid
Source The Lewin Group analysis of American
Hospital Association Annual Survey data, 1980
2001
29
Cost Shifting among Academic Health Center
Hospitals has Declined
Source The Lewin Group, Financial Performance
of Academic Health Center Hospitals, 1994
2000, prepared for The Commonwealth Fund,
September 2002.
30
As have Academic Health Center Hospital Margins
Source The Lewin Group, Financial Performance
of Academic Health Center Hospitals, 1994
2000, prepared for The Commonwealth Fund,
September 2002.
31
Evidence of Physician Cost Shifting
Source The Lewin Group, The American College of
Emergency Physicians (ACEP) Practice Expense
Study, for the American College of Emergency
Physicians, September 15, 1998.
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Conclusion A Critical Juncture Approaching?

• Cost Shifting today
• -- Health care costs and insurance premiums
  increasing again by an average of between 10 and
  15 a year since 2000, the largest annual
  increases since 1990.
• -- Employers passing much of it along to
  employees in the form of increased deductibles,
  co-pays, and monthly payments. More and more
  small businesses (10 or fewer employees) dropping
  coverage.
• -- rise of private, physician-owned surgical,
  radiological centers
• Exit Question What do providers do when every
  payer only wants to pay the marginal cost? How
  do we finance the entire health care system?