Lecture 2

1. Lecture 2 The Evolution of the US Health Care System

2. Outline • Evolution of Private Insurance • The Need for Public Insurance • Current Trends • Evolution of Medicine

3. The Evolution of the Private Insurance Market • At the turn of the 20th century medicine was becoming big business. • The average American spent about $100/year in today’s dollars • Advent of medicines that actually worked and other innovations resulted in large increases in demand for doctors and hospital services. • By the early 1930s healthcare accounted for about 4% of GDP

4. The Private Insurance Market • Great Depression • Average hospital receipts fell by 75% • Rufus Rorem: University of Chicago, economist and chair of AHA’s Committee on Uniform Accounting • He suggested charging a modest monthly payment in exchange for free access to hospital care • Initially about $.50 per month • Baylor Hospital marketed to local school teachers • Hospitals in St. Paul, MN were the first to use the Blue Cross Name • Blue Shield plans followed – focused on physician care

5. The Private Insurance Market • By 1940 there were fifty-six plans with six million enrollees in nearly every state. • But still only about 9% of individuals had insurance coverage. • Indemnity health insurance plans • Prepayment of pooled premiums • Enrollees could choose any hospital • Plans paid hospitals on a fee-for-service basis • No copayments

6. The Private Insurance Market • Commercial for-profit insurance soon followed • Aetna in 1936 • Cigna in 1937 • By 1940 commercial indemnity insurers had matched the Blues enrollment of 6 million • 2/3 of all policies were sold to groups --mainly employers

7. The Private Insurance Market • World War II • In 1942 National War Labor Board imposed wage and price freezes to prevent inflation • Demand for labor increasing, supply of labor decreasing • Employers increasingly offered nonwage benefits, including health insurance • Many of these benefits were not taxable • The Revenue Act of 1954 made the tax exemption permanent and comprehensive • For the typical worker in the 15% tax bracket, the cost of insurance is reduce by about a third. For higher income workers the subsidy is even greater.

8. The Private Insurance Market • By 1944 hospital insurance covered 29 million people. • By 1954 more than on hundred million had coverage and fifty million had coverage for physician expense • 70 percent of those insured were under group coverage primarily through their employer

9. The Private Insurance Market • The Employer-based system worked well for those with employment • Large risk pools • Increased bargaining power • Implicit mandate • But a large part of the population was left out • Elderly and indigent • 1965 Social Security Amendments • Medicare and Medicaid

10. Public Insurance • Medicare • Part A – Hospital Coverage (mandatory) • Part B – Physician Coverage (optional) • Part C – Managed Care Option • Part D – Prescription Drug Coverage

11. Public Insurance • Medicaid • Health insurance coverage for low income children and adults • Assistance to Medicare beneficiaries (aged and disabled) • Long-term care assistance

12. The Public Private Blend • By the 1970s about 90 percent of Americans had reasonably complete health insurance • Most privately insured were covered through their employer • Private insurance market dominated by nonprofits – mostly community rating • Viable safety net existed for those without insurance • Access was not really a policy issue • But then people started to worry about costs

13. Source: NY Times April 28, 1968

14. Changes over time • Employer-based coverage peaked in the 1980s and has been slowly declining. • Movement away from community rating to experience rating. “quasi-social insurance” nonprofit Blues with large firms. Unions played key role • Movement of for-profit insurance moved toward experience rated plans • Movement to self insure

15. The Managed Care Era • In the 1990s we turned to managed care to control cost • Under 30 percent of the population in the late 1980s • Over 90 percent a decade later • “The reversal of economics” • Fee-for-Service: moral hazard and supplier induced demand • Capitation: providers were required to hold risk • Narrowed networks

16. The Managed Care Era

17. The Managed Care Era • Direct connection between managed care penetration and slowdown in health spending • Spending = Price x Quantity • Selective contracting resulted in substantial discounts from providers • Some evidence HMO patients received fewer services • Was quality lower? • Studies on HMO quality are almost equally divided between those showing HMOs provide higher quality, HMOs provide lower quality, and no difference in quality

18. The Managed Care Era • Thus HMOs appeared to bend the cost curve without a sacrifice in quality • So what happened? • Provider income was reduced • Lack of choice was associated with lack of quality • Lack of transparency to savings • HMOs became the bad guys • Harris Survey: 1997 51% said managed care was doing a “good job” in 2000 this fell to 29% Only tobacco ranked lower • Provider consolidation

19. Flaws in the Employer-Provided System • Administrative costs – on the order of 13-16% of premium. Does not include administrative costs on the provider or employer’s side. • Allocation of costs – higher wage workers pay less when account for tax savings • Labor relations • Misaligned incentives

20. Trends in Coverage

21. Trends in Coverage

22. Trends in Coverage

23. Trends in Coverage

24. Trends in Coverage

25. Trends in Coverage

26. The Evolution of Medicine • In the early 19th century medical science was primitive • Few demonstrable benefits to patients • Not much state licensure (strong movement against) • Basically an apprentice system • The late 19th century brought economic and technological developments • Antisepsis and anesthesia • Medicine achieved the ability to actually benefit patients

27. The Evolution of Medicine • Johns Hopkins Medical School • Established in 1893 • Required all entrants to hold college degrees and complete four additional years of study for graduation • Leading university-based medical schools adopted this model • Licensure laws were passed in every state by 1901

28. The Flexner Report • A study initiated by the AMA and conducted by the Carnegie Foundation • Named after Abraham Flexner, the researcher who conducted the report • Found a high percentage of medical schools were inadequate beyond remedy • No qualified faculty, laboratories, or attendance requirements • Resulted in large-scale closure of medical schools that did not conform to the Johns Hopkins model

29. The Flexner Report • While improving quality, it greatly restricted entry • 131 US medical schools operating in 1906 dropped to 81 by 1922 (today there are 141 MD granting institutions in the US). • 3535 graduates in 1915 declined to 2529 by 1922 (over 17,000 in 2011). • Schools that admitted African Americans or women were largely those considered irremediable

30. The AMA • Founded in the 1840s the American Medical Association championed modern scientific medicine • Played an important part in reinstatement of licensure and requirements of medical education • Started as a progressive organization • Became more conservative in the 20th century. • Stove to keep the supply of physicians low, despite a increasing population • Opposed both expansion of medical education and immigration of foreign physicians • Opposed health insurance when it first appeared • Excluded physicians involved with HMOs • Opposed Medicare and Medicaid

31. The AMA • While still a powerful organization, the AMA has lost some of its power • Much more diverse physician population • Other important interest groups

32. What We Learned • Patchwork network of access to care • Evolved mostly by historical accident • Managed Care seemed to succeed but was unpopular • Trends in coverage • Rising insurance premiums • Offer rates have fallen for workers in small and low wage firms • Employees paying a larger share of coverage • Flexner Report • Role of AMA in increasing quality and restricting entry