A History of Payment Models for Healthcare

1. A History of Payment Models for Healthcare Jeff Cashman MS, DO Associate Dean for 4th Year Curriculum and Graduate Medical Education-Via College of Osteopathic Medicine Family Medicine Faculty at Spartanburg Regional Family Medicine Residency SCMA Bioethics Retreat

2. Objectives • Understand the history of payment models in the United States healthcare system • Determine ethical implications of the historical payment models • Explore the pitfalls of previous payment models and how that can be applied to our current system/situation

3. Company/Person Service or good Customer

4. Hospital or Doctors Office Service or Product Insurance Company Patient

5. Hospital or Doctors Office Service or Product Insurance Company Employer Patient

6. Hospital or Doctors Office Service or Product Insurance Company Other Payers/Patients Patient

7. A Brief Introduction and Timelines

8. 1800s • From the Library of Congress (Paying the Doctor in 18th-Century Philadelphia) • Payments documented by William Shippen Jr. between 1775-1793 • Many paid in cash, but was generally the wealthy and head of household (household at that time included family as well as apprentices, servants and slaves) • If no cash to pay, documents show payment was made with: • Coffee, Tea, Wine, Beer • Lengths of Muslin, Linen and calico; handkerchiefs, silk stockings • Tablecloth, looking glasses, crockery and a tea table • At times he was paid with items of uncertain value: a lottery ticket and a ‘bad painting’

9. Payments to Dr. Shippen • One patient paid £3.10 for his medical services and £350 for housing as he was not only a physician (a ‘Man-Midwifery’…OB-GYN) but also handled real estate transactions • Some never paid and listed as ‘bankrupt’ or ‘gone’ • These documents showed the different payments, but also how the poor were dependent on the goodwill of others • Many times service was dependent on having someone being able to pay beforehand

10. Milestones of Hospitals in Healthcare (13) • 1820s: Almshouses/poorhouses developed to serve the poor. • Provided food and shelter to treat the ill • Pesthouses, operated by local governments, quarantined contagious people • First hospitals were in big cities and were a refuge for the poor • 1850s: A hospital system was developed, owned by physicians, but mostly unskilled workers • 1890s: Patients went to hospitals when there was no other choice • But referrals to doctors in hospitals start to create professional power • 1920s: Medical training improves and medical specialization starts • As well, increase in the economy

11. Milestones of Hospitals in Healthcare • 1930s: physician owned hospitals are now owned by churches, government organizations or larger facilities • 1970s: The first Patient Bill of Rights introduced to have patients represented in hospital care • 1974: Certificate of Need (CON) introduced, states must have CON for federal funding • 1980s: 85% of hospitals offer ambulatory surgery • 1985: EMTALA enacted requiring hospitals to screen and stabilize all patients (regardless of ability to pay) • 2002: the Joint Commission issued standards for consumer awareness

12. Definitions to Consider

13. Now we need to define some terms… • Cost: this can be broken into 3 different areas: • Provider cost: what it takes to deliver health care services • Payer cost (and who is the payer?): the amount payed to providers for that service • Patient cost: what is actually spent ‘out-of-pocket’ for the service • May also have ‘Purchaser’: when a company pays for the insurance (payer) • ‘Charge’ or ‘Price’: • What the health care provider requests for a service or good (appears on the ‘medical bill’) • Reimbursement: The payment made by a ‘payer’ to a ‘provider’ • Fee for service: paying the provider for a service delivered • Per Diem: payment for each day in the hospital • Diagnosis-Related Groups (DRGs): paying for each episode of hospitalization • Capitation: paying a structured amount for each patient under the provider’s care *Adapted from AMA Journal of Ethics: Defining Costs, Charges and Reimbursement

14. Hospital or Doctors Office Service or Product Insurance Company Patient

15. Chargemaster • How do hospitals come up with costs • Hard to determine costs such as ‘check-in cost’ as there are different amounts of labor for different processes (previously scheduled appendectomy v. emergency) • Would need to track this over a long period of time due to variations in number of visits • Most hospitals will develop a ‘chargemaster’ • Itemized list of prices • Often these prices are set at levels well above the actual cost • Would be for negotiating power with insurance company • However, for ‘cash-pay’ patients, the charge will be what is listed on the chargemaster

16. Chargemaster

17. Inpatient v. Observation • Now hospitalizations may be considered ‘observation’ if it does not meet a set of criteria to be considered an inpatient stay • Easy to say if it is less than 2-midnights…certainly not that simple • This causes many issues on the hospital side but also for the patient • Patient will often pay a set deductible (around $1,200 for acute hospitalization) then Medicare will cover the rest, up to 60 days • If patient goes to ER and has less than 2-midnight stay in hospital, may be considered ‘observation’ status • This is good because costs can be less…right???? • Well…copayment for this may be up to 20% of total charge

18. Diving in Deeper to the Factors Leading to Today’s Climate

19. Early Health Care Costs • Healthcare was different in the early 1900s than today • In the early 1900s care was mostly based on preventing illness by keeping clean, having a good diet and providing good nursing “The cost of health care treatment was considered a minor problem compared to the loss of wages due to sickness for most workers” (7) • Things started to change in the 1920s • Banting, Best, and Macleod discovered the active ingredient in insulin at the University of Toronto (8) • Then Eli Lilly was able to produce large quantities of insulin

20. Medical Advances Change Healthcare Costs • Hospitals were a place for the people who could not pay for care or whose family could not care for them (just not much to be done) • With the exception of smallpox, vaccines were mostly developed after WWII • Hospitals were, generally, for chronically ill and indigent patients • Often this was paid by charity • Those who could afford the care, would receive it at home • When aseptic procedures came into routine practice, surgical patients and acutely ill patients began to be treated in hospitals • Hospitals started to charge patients for care

21. Growing Hospital Costs • Hospital costs rose from 7.6% of family medical bills in 1918 to 13% by 1929 • Other healthcare costs were generally 2-3% of household income • With continued increase in the use of hospitals (and increasing physician bills) the percentage, of household costs, also continued to increase • Up to 40% of total family medical cost by 1934 • Americans started to look for tax-supported, government run health care schemes • Progressive Party had national health insurance on its party platform in 1912

22. The role of the AMA • Founded in 1847, the American Medical Association has worked on behalf of physicians in many aspects • Litigation protection • Improving hospital privilege processing • Organizing county medical societies • Raising member income • Membership drives increased membership from 10% of physicians to 50% from 1900-1925 • Developed standards in medical education and licensing • This increased costs of healthcare • Unsure if it increased consumer welfare (or if it was desired by consumers) • With these measures and the Flexner report, the number of medical schools decreased • The surviving institutions were mostly associated with hospitals and universities • Physicians per capita dropped from 157/100k in 1900 to 125/100k in 1930

23. The role of the AMA • AMA has played a strong role in many steps of the health care payment changes • In 1927 paying for modern medicine was the top item on the agenda at the AMA convention • Majority believed in group practices centered around hospitals • However service delivery, in this model, was based on previous good results from a small number of practitioners • AMA and Dr. William Mayo believed in moving away from group care • Encouraged credentialing and licensing • Thought to improve care and decrease cost, however these requirements (never proven to help care) has most certainly led to increased costs

24. Insurance starts to develop • Estimated health payments in 1929: $3,649 million • $2,930 million were direct payments (out-of-pocket) • $495 million paid by public sources • $217 million from philanthropy • Most of the ‘sickness insurance’ groups were not related to work: • Loyal order of Moose, Knights and Ladies of Security, etc… • These organizations would contract with physicians • In late 1800s, 1/3 to 1/2 of ethnic minorities in southern and eastern cities were members • In 1888 in New Orleans, 88% of entire population was covered by prepaid ‘lodge medicine’ • Many adult males were members of fraternal societies that provided services including: • Orphanages, hospitals, homes for the elderly and scholarship programs • However, tied insurance to the working male of the family

25. Original Insurance? • Fraternal societies were a main source for ‘sickness insurance’ • Had home visiting committees to uncover false claims • Behavioral requirements: “members receiving benefits could not drink or gamble and in some cases were not allowed to be away from their residence after dark.” • Medical societies started to pressure licensing authorities to deny physicians who had lodge contracts • Baylor Hospital Insurance: developed at the end of the 1920s • Dallas teachers arranged for Baylor Hospital to provide 21 days of hospitalization • $6.00 yearly payment in return

26. The Baylor Hospital Plan of 1929 • Allowed 21 days of hospitalization • Initially developed as a way to ensure people paid their bills • The ‘Sickness insurance’ was set up for workers (teachers) so there was a healthier population • Had to be well enough to work • Next, Los Angeles Department of Water and Power provided health care to its employees and dependents (1929) • By mid 1930s other associations joined and covered over 37,000 people • Then…the Great Depression

27. The Great Depression • Hospitals, among many others, were hit hard • Sought ways to ensure bills were paid • A year after the crash of 1929, hospital receipts per person fell from $236.12 to $59.26 • 89% of charity care beds were filled • Private hospitals reduced to 62% capacity • So pre-paid health plans allowed hospitals to pay support and staff • American Hospital Association supported and marketed prepaid plans to ‘relieve hospitals from financial embarrassment and disaster’

28. Birth of Blue Cross • Prepaid plans from each hospital generated a lot of competition • Community hospitals started to organize together to offer network options, reducing competition • These community hospital networks joined together with the American Hospital Association • In 1939 the AHA adopted the ‘Blue Cross’ name and logo as a symbol to show the plans offered met certain standards • Blue Cross was not seen as insurance because owned by hospitals • Exempt from state insurance requirements and were non-profit • Saved 2%-3% on taxes

29. Birth of Blue Shield • Blue Cross was beneficial because of the legislation with tax relief • Physicians feared the Blue Cross style would cause hospitals to expand to prepaid physician services • In 1939 the first prepaid physician service plan started in California • The AMA and state societies encouraged other similar plans • In 1946 these organizations affiliated to form Blue Shield • Net revenues (premiums minus benefit payments) were less than 5% of total premiums • 2-3% tax decrease is equal to about 50-60% of net revenues • Made it challenging for private insurance to offer similar style of plan to Blue Cross Blue Shield • Now, most all plans must be a hospital-favored plan • Since all services are paid for by a third party (hospitals are able to negotiate costs) • **Decreases patient incentives to monitor costs

30. The Impact of ‘The Blues’ • 1939 only 6% of the population had a form of hospitalization insurance • This increased to 12.4% by 1941 • 51% of this was through Blue Cross • 33% had individual policies from insurance companies • 12-14% still had plans such as the ‘lodge plans’ discussed earlier • By 1945, 23% of the population had insurance • 59% through Blue Cross Blue Shield plans • With the growth of the economy in the 1950s, the percentage of Americans covered increased and the proportion of Blue Cross Blue Shield decreased • Stabilized since the 1970s: • About 86% of the population with insurance • 46% being covered by Blue Cross Blue Shield

31. Payment for ‘Everything’ • Initially, when the concern for Blue Cross Blue Shield was to pay its members, the plans covered ALL costs • Including routine and more-easily affordable services • Free from direct financial responsibility, doctors and patients could command whatever medical service they wanted • Payments were, mostly, from other people’s money • People who used little medical care paid the same as those who used a lot

32. Payment Models of “The Blues” • Per Diem Formula: • (Total costs of the hospital/total patient days) X fraction of Blue Cross patients • Department Model: • Hospital Department cost X patients who were covered by Blue Cross and used the department • Combination Method: • Per Diem Cost of routine services of % patient days from Blue Cross patients ADDED to the Blue Cross % of ancillary services

33. A Major Problem!!! • The three payment models do not create incentives • All hospital costs should be paid whether or not they were efficient • So a reduction in cost by the hospital (or increase in efficiency) reduced the amount of revenue collected by the hospital • This allowed hospitals to manipulate prices so payments from private insurance would subsidize care to uninsured • By 1980 Hospitals had no incentives to: • Minimize costs • Determine actual costs • Control capacity expansions • Specialize in services in which the hospital may be the low cost provider • Minimize patient stays

34. A Detour for a second…. • This is not a talk about the best plan or best option for insurance, but I want to take a minute to consider the payment models we have now • An example from the Wisconsin Policy Research Institute HOMEOWNER INSURANCE

35. Homeowner Insurance Example • The Homeowner purchases insurance • His or her house burns down….

36. Homeowner Insurance Example • Homeowner contacts insurance company, determines the amount owed by the insurance company, and is paid • Homeowner hires who is needed to repair his or her home

37. Homeowner Insurance Example • In this scenario, the insurance company does two things: • Charges the homeowner a premium based on the likelihood that he or she will incur a loss • Maintains assets and reserves sufficient to pay for expected losses

38. Comparing Homeowners to Healthcare • Homeowner may have costs for years, but the insurance company does not need to have continued involvement (pays a lump sum) • The ability to pay for repairs is not contingent on continued payment of premiums while rebuilding • Lump sum payment gives the homeowner incentive to find contractors who will offer a good value • Compare this to the medical insurance model (the Blues) • The company reimburses those providing the service • Instead of reimbursing the person/group paying for the policy or receiving the health care • No reserves are created from past premium income to pay losses • The following year’s premiums remain, roughly, expected total costs of services divided by total number of members • An insurer is only liable for continued payments if the insured continues to be covered (often by an employer) and pay premiums

39. How would it look if it were the other way? • Each contractor would submit its bill to insurer as the house was being rebuilt • All insured homeowners would have premiums increased to bear the additional costs • Costs would be whatever the insured and his contractors determined they should be (limited by maximum amount in policy) • Payments would be what the insurance company determines • If homeowner becomes unemployed, stops paying premium, or changes jobs; the insurer would stop paying for reconstruction

40. Back to the development of health payment system

41. The Rise in Employer Provided Group Insurance • Many consider the detachment of patients with cost of medicine the chief reason hospital costs skyrocketed after World War II • Following the Blue Cross example, many other insurance companies realized working through employers was a good model with lower risk • The 1942 Stabilization Act: • Placed price controls on employers by limiting employee wage increases • Allowed employers to offer health insurance as a pre-tax benefit • This became a way for wealthy companies (many more after the war) to make tax-free packages that covered the most trivial medical expense • 1951: 100,000 employees (and dependents) covered by major medical plans • 1960: Major medical covered 32 million people • 1986: This number increased to 156 million

42. Social Security Act • 1935 Franklin Roosevelt signed the “Second New Deal” • Groundwork for national welfare system • Mostly providing for the elderly, unemployed and children • Has been amended multiple times, most notably: • Title XVIII: established Medicare • In order to implement Medicare, social security administration changed to Bureau of Health Insurance • Develops health insurance policy • Title XIX: established Medicaid • Social Security Administration becomes independent from Department of Health and Human Services

43. Medicare • Teddy Roosevelt had national insurance on his platform in 1912 • Unsuccessful in moving through congress • Not much push until Harry Truman in 1945 • Covering doctor visits, hospital visits, laboratory work, dental and nursing care • Bills were not passed and the plan morphed into coverage for elderly, not all • Kennedy was unsuccessful although, in 1960s, 56% of Americans over age 65 did not have insurance • 1965 Lyndon Johnson signed Medicare into law • Harry Truman received the first Medicare card • Budget of $10 billion and 19 million Americans signed up • 1972 Richard Nixon signed first major changes • Expanded Medicare for long-term disability and patients with End-Stage Renal Disease

44. Medicare • Home health coverage and Hospice were added as benefits in the 1980s • Also attempts to have caps on out-of-pocket costs which have been repealed • 1988: Medicare Catastrophic Coverage Act • Creates a limit to Medicare’s out-of-pocket expense (for Medicare Part A & B) • However, this was appealed a year later after complaints from senior groups about higher premiums • Still no cap on out-of-pocket expenses for Medicare Part A & Part B • States must buy-in to Medicare system (using Medicaid funds) to offset costs • Qualified Medicare Beneficiaries (in 2015 there were 7.2 QMBs) • Similar programs through the 1990s were developed to help beneficiaries cover costs • Medicare Part C: Medicare Advantage Plans • Gave the option of Private Medicare options (and Medicare HMOs)

45. Medicare • In the 2000s patients with ALS could have immediate coverage (regardless of age) • If approved for Social Security Disability Income • 2003: Medicare Prescription Drug Improvement and Modernization Act • Added optional prescription drug benefits (Medicare Part D) • Only provided by private insurers (prior to this 25% did not have drug coverage) • 2015: Medicare and CHIP Reauthorization Act • Established a way for CMS to change the way Medicare pays physicians • Moving towards “value and quality” rather than just the number of services • ACA also worked to decrease out-of-pocket costs for drugs (closing the ‘donut hole’)

46. Medicaid • Part of ‘Title XIX’ of the Social Security Act in 1965 • Contrary to Medicare (federally funded), Medicaid is a joint state-federal program • States receive federal assistance in funding care to federally recognized low-income individuals, and families • Must care for a federally designated group, but also state-selected recipients • Original focus was to provide acute care for public assistance recipients • Has now become the primary funding for long-term services for disabled • 1972: Addition of the Supplemental Security Income (SSI) • Income assistance for people with disabilities • Medicaid eligibility linked with SSI eligibility

47. Medicaid • 1980s saw the addition of low-income pregnant females and children who do not receive public assistance payments • Creation of Disproportionate Share Hospital (DSH) payments • Additional funding for hospitals with large numbers of Medicaid and low-income patients • 1990s: Personal Responsibility and Work Opportunities Act of 1996 • Increased eligibility for legal immigrants • Eligibility for Medicaid no longer tied to receipt of public assistance cash funds • 1997: State Children’s Health Insurance Program developed • Offered states more funding for children in low income households • Majority of recipients using Managed Care programs • This has significantly changed what services are offered by Medicaid programs

48. Children’s Health Insurance Program (CHIP) • 1967: Early and Periodic Screening, Diagnosis and Treatment (EPSDT) • Comprehensive health benefit for all children • Balanced Budget Act of 1997 created Children's Health Insurance Program • Federally matched funds for states to provide care for children • Qualify if family income is too high for Medicaid but not qualifying for private coverage • All states have increased children’s coverage through CHIP • Most all cover up to 200% federal poverty level

49. The Employee Retirement Income Security Act of 1974 (ERISA) • Set a standard for pension plans (including health and life insurance) • For any employer who provides benefits • Only affects insurance plans offered by employers (not privately purchased plans) • Does not require an employer to offer benefits, but regulates benefits if done • However, this has prevented some states from implementing health care financing reform • ERISA will preempt the changes proposed by states

50. Disproportionate Share Hospital Payments • Prior to the Disproportionate Share , Medicaid used ‘reasonable costs’ standards and allowed states to set reimbursement standards within the Medicaid program (20) • 1981 Disproportionate Share Hospital Program (DSH) was introduced • To help hospitals who provided large amounts of uncompensated care (for uninsured or underinsured) • Was not commonly used until 1990s when incentives were added (and loopholes were found) • States now create eligibility criteria, however, a hospital must have a significantly higher than average Medicaid inpatients (compared in state) • Must also have 2 OB-GYNs on service if offering obstetrics • Covers acute care and psychiatric hospitals/facilities • DSH allotments to South Carolina in 2014 was $349,269,075