Catch Me If You Can: Hospitals, Physicians, and the

Game of Medicare Payment Policy

Department of Health Evaluation Sciences

University of Virginia School of Medicine

October 13, 2004

Rick Mayes, Ph.D.Assistant Professor of Public Policy

2

Underlying Medical Inflation: The Rise and Fall (and Rise Again?) of Managed Care

8.5%

0.8%

6.0%

14.0%

18.0%

12.0%

13.9%

12.9%

10.9%

8.2%

5.3%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Year

Health Insurance Premiums

Overall Inflation

Workers' Earnings

Sources: Census Bureau, Kaiser Foundation, CMS, 2004.

3

Since 2001, on average . . .

- 5 million fewer jobs now provide health insurance in the U.S.

- the avg. cost of health insurance premiums has increased 59% (versus 10-12% in wages & general inflation)

- employee contributions for health insurance have grown: by 57% for single coverage (total of $3,695 annually, 2004) by 49% for family coverage (total of $9,950 annually, 2004) avg. premium for family coverage ($14,565 projected, 2006)

- A growing proportion of the overall increase in premiums for employers has been “shared” with employees, particularly those in small businesses.

Underlying Medical Inflation: Health Insurance Premiums

Source: Henry J. Kaiser Family Foundation/Health Research and Education Trust Survey of Employer Health Benefits, Health Affairs Sept./Oct. 2004.

4

Health Insurance Premiums & Declining Coverage

5

Health Insurance Premiums & Declining Coverage

6

Source: American Hospital Association’s Annual Survey of Hospitals (n=6,800 hospitals), 2005. Pearson’s correlation coefficients:

1984-1997: Medicare and Private ratios: r = -.86 1980-2003: Medicare and Private ratios: r = -.73 1984-1997: Medicaid and Private ratios: r = -.39 1980-2003: Medicaid and Private ratios: r = -.56

Hospital Payment-to-Cost Ratio by Payer, 1980-2003

101%

91%

99%102%

88%

83%80% 80%

91%

114%116% 116%

Medicare

96%

101%

88%

95%

Medicaid

92%

97%95%

93%

Private

115%

122%

131%

122%124%

70%

80%

90%

100%

110%

120%

130%

140%

81 83 85 87 89 91 93 95 97 99 2001 2003

Year

Rat

io (

in p

erce

nt)

7

Cost-Shifting (or Cross-Subsidization)

• Perhaps best thought of as a lubricant within a massive series of financial feedback loops between:

- government (Medicare, Medicaid)

- providers (hospitals, physicians) and

- private payers (insurance companies,

employers, patients).

8

Source: Glenn Melnick, “Uninsured Americans,” Hearing Before the Subcommittee on Health of the Ways and Means , U.S. House of Representatives, 108th Cong., 2nd Sess. (9 March 2004); Professor Melnick’s testimony from the Center for Health Financing, Policy and Management, School of Policy, Planning and Development, University of Southern California.

Technical Note: Data are derived from the Medicare Prospective Payment System’s Impact File, Centers for Medicare and Medicaid Services (CMS, 2004), available at http://www.cms.hhs.gov/providers/hipps/ippspufs.asp, last visited October 1, 2004).

Ratio of Hospital Charges (List Prices) to Costs in the U.S., 1993-2003

167%

175%

181%

186%

191%

211%

200%196%194%

164%

159%

150%

160%

170%

180%

190%

200%

210%

220%

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Year

9 Source: MedPAC (June 2004)

Number of Independent Diagnostic Testing Facilities,2000-2002

1,7842,012

2,4032,655

3,615

3,197

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2000 2001 2002

YearEntities

Locations

Segmentation of U.S. Health Care System Increasing

10Source: CMS, Office of the Actuary, 2004.

Medicare Payments to Ambulatory Surgery Centers (in $ Billions), 1993-2003

$0.6$0.7

$0.8$0.9

$1.0$1.1

$1.2

$2.1

$1.4

$1.8

$1.6

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Year

Segmentation of U.S. Health Care System Increasing

11

12

POLICY implications of the significant rise in physician-owned: ambulatory surgery centers, specialty hospitals, and diagnostic imaging centers:

1.) prospects for improved quality, lower costs, and more professional autonomy

- not a new phenomenon (e.g., heart hospitals in London 1857, psychiatry clinics, ear

and eye hospitals, obstetrics & gynecology hospitals)

- Adam Smith and the advantages of specialization (e.g., pins and “focused factories”)

2.) financial impact on community hospitals: fair or unfair competition?

- “cherry picking” the best-insured private patients by, largely, for-profit entities

- “skimming” lower-cost, healthier Medicare cases within individual DRGs

- cardiac, orthopedic, radiological services: huge proportion of hospitals’ net revenues

3.) impact on communities’ overall access to care

- declining volume & smaller patient populations make charity care harder to provide

- vulnerability of emergency services, burn units, psychiatric facilities

- complicates doctor-hospital relationships (e.g. staff privileges, economic credentialing)

- can easily exacerbate the development of a multi-tiered health care system

13

Present & Future Concerns• (1) The ultimate cost shift is both prevalent and

increasing in scope and degree: employers passing on a larger and larger share of their increased health care costs to their employees . . .

- higher monthly wage deductions and/or increased co-payments,

deductibles, out-of-pocket costs (especially for employees’ dependents)

• (2) Beyond this strategy, more and more employers have simply stopped offering health insurance . . .

- (15% of the U.S. population is uninsured; 45 million individuals or the

aggregate population of 24 states, Census 2003)

14

Conclusion: How much should the government pay medical providers?

TOM SCULLY: “My frustration is that you’re trying to be a government contractor. Hospitals usually get about 50% of their revenues from Medicare & Medicaid; doctors, on average, generally come into practice getting roughly 30% or so from Medicare & Medicaid.

So if you’re a doctor or if you’re a hospital, fundamentally a big chunk of your business is as a government contractor. And your expectation, I think, when dealing with the government—whether you’re in the Pentagon or in health care—is boring consistency, decent operating margins that don’t flop around. If you’re Boeing, you don’t want to have a 25% margin one year and a negative 2% the next year, right?”

- Interview with Tom Scully, Administrator, Ctrs. for Medicare & Medicaid Services, 2001-2003

15

Exit Questions

(1.) What do providers do (or have to do)

when each payer only wants to pay the marginal cost?

(2.) Who is ultimately responsible for the common good in a competitive market?