Payment Systems USA Healthcare

1. Payment Systems USA Healthcare Daniel B. McLaughlin

2. Outline • History • Economics principles • Payment today • Doctors and outpatient services • Hospitals • Health Plans • Future

3. Cash for services Rise of insurance – BCBS WWII – insurance expands FFS becomes more sophisticated as more services are added CPT and ICD coding starts Insurance costs escalate Paying for healthcare - a History

4. 1850-1870: Louis Pasteur, Joseph Lister and others develop understanding of bacteriology, antisepsis, and immunology 1870-1910: Identification of various infectious agents including spirochaetapallida (syphilis), typhus, pneumococcus, and malaria. Diphtheria antitoxin developed. Surgery fatality rates fall. 1887: S.S.K. von Basch invents instrument to measure blood pressure. 1895: Wilhelm Roentgen develops X-rays. 1910: Salvarsan (for syphilis) proves to be first drug treatment that destroys disease without injuring patient. 1920-1946: Insulin isolated (1922), sulfa developed (1935), large-scale production of synthetic penicillin begins (1946). 1955: Jonas Salk announces development of vaccine for polio. The limited scope of medical care in the past

5. The birth of Health Insurance 1920’s – chief cost to familieswas lost of salary due to illness 1930s – Flexner report with increases in quality and cost of medical education reduced number of MDs and caused costs to rise 1930-40 – Birth of Blue Cross and Blue Shield Influenced by the depression Hospital interest in filling beds Blue Cross founded by AHA Blue shield founded by AMA

6. Health insurance 1940 - 60 Commercial insurance enters the market Community rating versus experience rating provides growth for commercial products WW II stabilization act and growth of health insurance Health insurance determined to be non taxable to individuals and a business expense to companies

7. 1960s and the Great Society Medicare and Medicaid Opposed stronglyby AMA Medicare:Usual and customarycharges which was modeledon BC/BS Medicaid state based and tied to public assistance Rapid growth in healthcare costs

8. 1973- HMO act 1974 – ERISA: employers became self insured 1996 – HIPAA – employee could move to other employers without discrimination 2010 ACA Rise of Managed Care

9. Doctor “gatekeepers” and public backlash Multiple plan offerings by large employers Death spirals Medical groups take risk and failin the 1980s – 90s Technical problems Risk adjustment Stop loss Reserves MLR Lack of HIT Early Challenges of Managed Care

10. History of hospital payments Medicare and Medicaid Cost based DRGs Policy additions Medical Education DSH Medicaid and Intergovernmental transfers

11. Types Clinic/MD services Long term care Surgery centers Drugs Medical equipment Payment per service Prices set by Medicare except for drugs Sustainable Growth Rate – SGR and the Doc fix Ambulatory Care

12. Growing concern about access/coverage throughout last 50 years Reform plans from Truman Johnson: Medicare and Medicaid Nixon Clinton Obama ACA added quality and cost reductions as goals Health Care Reform

13. Health Care Economics

14. General Financing Model Taxes Government Medical Care Employers Insurance Personal Assets Individual Health Productivity

15. 1. Scarcity and Choice • Limited resources but unlimited wants • Must allocate resources among competing objectives • Implications • Resources used for health can not be used elsewhere • Cannot have everything we want – hence tradeoffs

16. 2. Opportunity Cost • Everything and everyone has alternatives • Time and resources can only be used once • Any action results in another action not taken – “Opportunity cost” • Implications • Medical care involves costs as well as benefits • E.g. CT scan diminishes funds available for immunization

17. 3. Marginal Analysis • Decisions are made at the margin of cost/benefit • Incremental costs can provide incremental benefits • Implications • When marginal costs are low services are treated as “free” – e.g. first dollar coverage • Balancing of marginal benefit with marginal cost will result in optimal resource allocation (e.g. correct generic drug for hypertension)

18. 4. Self-Interest • People pursue their own self interest • People respond to incentives only when they benefit personally • Self-interest leads each individual to pursue actions that promotes the general welfare (Adam Smith)

19. Self Interest - Implications • People spending other people’s money have no incentive to economize • When self interest is furthered by information, people demand information • Good health is not always considered the primary self interest goal (e.g. sky diving, obesity)

20. 5. Markets and Pricing • The market is the most efficient mechanism to allocate resources • Everything and Everyone has a price • Pricing brings consumer demands and a firm’s outputs into equilibrium • Implications • The price of goods must be apparent to the consumer • It is difficult to pay for social goods (e.g. medical education) in a price sensitive environment

21. 6. Supply and Demand • Pricing and a firm’s output are based on supply and demand • Implications • The amount of medical care demanded by an individual decreases as the cost to the individual increases • Information is critical to making demand decisions • When prices are held below equilibrium shortages develop (e.g. workforce salaries) • Government administered pricing systems can never find the equilibrium point

22. 7. Competition • Competition forces owners to use their resources wisely to satisfy consumers • Good competitors who optimize their resources are rewarded • Competition promotes continuous improvement in the methods of production • Implications • Well functioning markets require competition • Consolidation can result in monopoly/oligopoly and shadow pricing • Inefficiency is reduced due to competition

23. 8. Efficiency • Efficient use of scarce resources promotes the social welfare • Implications • Specialization leads to cost savings • Not all organizational structures promote efficiency (e.g. small clinic vs. integrated system) • Firms will not be efficient unless payment systems reward efficiency

24. 9. Market Failure • Free markets sometimes fail to promote the efficient use of resources • Sources include: monopolies, external forces, public goods (e.g. education), incomplete information, and immobile resources (e.g. hospital buildings) • Implications • Policy making needs to accommodate market failure • Market power can insulate firms from competition • Public policy needs to accommodate: indigent care, medical education, population health

25. 10. Comparative Advantage • Markets promote economic efficiency by all competitors • Consumers buy the best product on the margin • Producers specialize in what they do best • Implications: • Economic discipline can substitute for governmental intervention • Consumers must have the funds to spend to have the markets functioning properly (e.g. universal insurance coverage) • Large (e.g. Marshfield) vs. small (e.g. Minute clinic)

26. Health Insurance

27. The Theory of Insurance • Expected probability of a loss vs. the premium. • Examples - Crutches • Crutches cost $100 • Premium per year = 10$ • Probability of need = 5% • 5% of $100 = $5 - Therefore self insure • If probability= 15% then buy insurance

28. Probability and Cost Cost of an Event Probability of Occurrence 0.0 1.0 (Routine screen) (Kidney Tx)

29. Risk and Insurance Insurable risk Cost of an Event Probability of Occurrence 0.0 1.0 (Routine screen) (Kidney Tx)

30. Insurance and the Prudent Buyer Today Insurable risk Cost of an Event Prudent Buyer Probability of Occurrence 0.0 1.0 (Routine screen) (Kidney Tx)

31. Insurance and the Prudent Buyer Tomorrow Insurable risk Cost of an Event Prudent Buyer Probability of Occurrence 0.0 1.0 (Routine screen) (Kidney Tx)

32. Health Insurance • HMOs • Group Model • Network Model • PPO • POS – Open Networks • Self insured vs. fully insured employers • Defined benefits vs. Defined contribution • Private Exchanges • ACOs with risk • Impact of Health Insurance Exchanges • Narrow networks but low cost

33. Risk Shifting Reinsurance and Stop Loss Patient Employer Insurance company Providers

34. Payment Systems today Ambulatory Care Procedure codes Diagnosis codes Hospitals DRGs Health Plans

35. Healthcare CommonProcedure Coding System (HCPCS) Includes CPT codes from the AMA Example Procedure codes

36. International Classification of Diseases 10- Clinical Modification (ICD-10 CM0 Example Diagnosis Codes

37. Finding codes • http://www.findacode.com/cms1500-claim-form/cms1500-claim-form.html

38. Billing Procedure Code (HCPC) Charge Master Medical Record Payer Discount Diagnostic Code • Review by Health Plan • Allowable • Codes match • Deductibles and Coinsurance Final Bill

39. Explanation of Benefits (EOB) • http://www.aetna.com/provider/data/sample_provider_eob_numb.pdf

40. Diagnosis Related Groups Additional Payment for Quality Penalties for Readmissions Recovery Audit Contractors ACA - Reduced Medicare payments for reduced uncompensated care Hospitals today

41. Larger network Replacement policies for employers Private and ACA exchanges Risk Adjustment Stop loss Risk corridors New relationships with providers for ACOs Health Plans

42. Future Bundling increased P4P – Quality payments Total cost of care Capitation Provider based Risk systems ACOs MN HCDS for Medicaid

43. Practical advice Understand policy purpose of each system For high deductibles plans get prices Negotiate in advance EOB – “This is not a bill” – check health plan discount

44. Thank You Dan McLaughlindbmclaughlin@stthomas.edu651-962-4143