economic relationships in health care
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Economic Relationships in Health Care. Peter Farrow – CEO & General Manager –. Overview. 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 - PowerPoint PPT PresentationTRANSCRIPT
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Economic Relationships in Health Care
Peter Farrow– CEO & General Manager –
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Overview• Characteristics of a Free Market• Health Care vs. Health Insurance• Does Price Sensitivity Exist?• Health Care Reform and the Future
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Characteristics of aFree Market
• Driven by Supply and Demand• Allocates resources based on a
price mechanism• Requires full information and
freedom of choice
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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)
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Health Care vs.Health Insurance
(cont’d)• Health Insurance (Group)– 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
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Typical Market Exchange
Patient
(Consumer)
Provider
(Supplier)
Payment
Services
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Health Care/Insurance Exchange
Patient
(Consumer)Provider
(Supplier)
Payment
Services
Insurer
Payment
Service Request
Service Authorization
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What’s Missing inHealth 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.
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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.− 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.
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What Should Health Care Market Look Like?
Patient
(Consumer)
Provider
(Supplier)
Payment
Services
Payor needs to function as surrogate, or representative, of one or the other.
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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.
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Analogy toCurrent Situation
• Early 1970s - Low prices for gasoline:– Large cars – Little conservation– No attention to mileage
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History of Gasoline Prices
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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)
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Percentage of Household Expenditures for Health
Care
1917-1919 1950 1960-1961 1972-1973 1986-1987 2005 20110.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
1917-1919
1950
1960-1961
1972-1973
1986-1987
2005
2011
All households – Bureau of Labor Statistics
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“Health Care, Health Insurance and the Distribution of American Incomes” 2009
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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
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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.
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“Health Care, Health Insurance and the Distribution of American Incomes” 2009
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“Health Care, Health Insurance and the Distribution of American Incomes” 2009
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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.
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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.
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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
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Are We GettingEffective Care?
The First National Report Card on Quality of Health Care in America, Rand Corp. 2006
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The First National Report Card on Quality of Health Care in America, Rand Corp. 2006
Does Coverage Matter?
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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
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The significant problems we face cannot be solved at the same level of thinking we were at when we created
them.
- Albert Einstein
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Questions?
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Thank You!