Stephen T. Parente, Ph.D. Carlson School of Management Department of Finance sparente@umn

1. University of MinnesotaThe Healthcare MarketplaceMedical Industry Leadership InstituteCourse: MILI 6990/5990Spring Semester A, 2017 Stephen T. Parente, Ph.D. Carlson School of Management Department of Finance sparente@umn.edu

2. Lecture #1 Overview • Course Overview • Syllabus • Faculty and student introductions • The U.S. healthcare marketplace: an introduction

3. Course Overview – Basic Info • Instructor - Stephen T. Parente, Ph.D • Sparente@umn.edu • Phone: 612-624-1391 • Office: 3-279 CSOM • Hours: by appointment (usually on Wednesdays) • Website: http://ehealthecon.hsinetwork.com/mili6990_2017.html • Lectures: every Monday

4. Course Overview - Readings • Set of readings that will be made available to you electronically. • You may need to get articles electronically through the library. • Additional material may be handed out in class.

5. Course Overview - Units • Historical Overview of the Healthcare Sector 2. Physician Services Market 3. Hospital Services Market 4. Insurance Market 5. Medical Devices and Pharmaceuticals Market 6. Healthcare Information Technology Market 7. International Healthcare Markets

6. Course Overview - Units • Each unit will include: • Introductory lecture • Research and practitioner findings • Emerging trends and market drivers

7. Student Evaluation • Market Sizing Memo (20%) • Data driven, Entrepreneurial/venture perspective • Due on 3/6/2017 at 4pm (or sooner) • Midterm Exam (25%) • In-class, closed-book, closed-note, 2/20/2017 • Mix of definitions, short answer, and essay questions • No make-up exams given unless pre-approved by an instructor. • Market Opportunity Research Paper (45%) • 1 page topic proposal due on 2/13/2017 • Final paper due on 3/6/2017, by 4pm • Participation (10%)

8. Market Opportunity Research Paper • Your choice of a specific health care market-oriented topic. • Identify a market opportunity in the medical industry. • Describe its history • Describe opportunities and limitations • Expand on an opportunity to affect this market that is: • Financially sustainable • Profitable for innovators • Cost-effective (from a societal perspective) • Paper could provide starting point for your MILI MBA specialization application (to be described later). • Logistics • 12 point font; 7-8 pages of text • Due Dates • Proposal: 2/13/2017 • Sizing memo: 3/6/2017 • Final paper: 3/6/2017, 4pm latest

9. Contractual Responsibilities • Student • Attend lectures • Engage in discussion • Learn by personal reading and investigation of research topic of choice • Instructor • Be prepared for lectures • Listen to students • Provide an exchange for ideas

10. Questions?

11. Introductions • Name • Year/program • Graduate school focus (e.g., finance) • What do you hope to do in 5 years? • Any specific healthcare interests/issues that are important to you. • What’s the most significant contact you or a family member had with healthcare?

12. An Introduction to the U.S. Healthcare Marketplace

13. <90% Income Federal Government Congress Main Street Biotechnology Big Business Physicians 99% Income 91-99% Income Courts Insurers Hospitals

14. Stakeholders • Consumers • Providers • Hospitals • Physicians and Clinics • Long-term care facilities (e.g., nursing homes) • Pharmaceuticals, Medical Device, Biotechnology firms • Insurers • Employers • Government

15. Healthcare Triangle Cost Access Quality

16. How much do we spend on health care? • $3,000,000,000,000 in 2014, which is equivalent to $9,523 for each man, woman, and child (310 million+) in the United States. GDP: 17.5% Source: https://www.cms.gov/research-statistics-data-and-systems/statistics-trends-and-reports/nationalhealthexpenddata/nationalhealthaccountshistorical.html

18. What factors drive health care spending?

19. Distribution of US Health Spending Source: AHRQ, 2012

20. % of U.S. population ranked by expenditures 1977 1987 1996 Top 1% 30% 28% 27% Top 2% 41% 39% 38% Top 5% 58% 56% 55% Top 10% 72% 70% 69% Top 30% 91% 90% 90% Top 50% 97% 97% 97% Distribution of Health Spending Source: NMCES, NMES, MEPS, Berk and Monheit (March/April, 2001)

21. Distribution of National Health Expenditures, by Type of Service (in Billions), 2010 Nursing Care Facilities & Continuing Care Retirement Communities, $143.1 (5.5%) NHE Total Expenditures: $2,593.6 billion Note: Other Personal Health Care includes, for example, dental and other professional health services, durable medical equipment, etc. Other Health Spending includes, for example, administration and net cost of private health insurance, public health activity, research, and structures and equipment, etc. Source: Kaiser Family Foundation calculations using NHE data from Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group, at http://www.cms.hhs.gov/NationalHealthExpendData/ (see Historical; National Health Expenditures by type of service and source of funds, CY 1960-2010; file nhe2010.zip).

22. Trends in US Health Spending Growth

23. Current Cost Driver in Health Care

25. Expenditures=Price*Quantity

26. International Comparison of Health Spending, 1980–2005 Average spending on healthper capita ($US PPP) Total health expenditures as percent of GDP Source: OECD Health Data 2007.

27. Where Does the Money Go?

28. Where Does the Money Go?

29. Where Does the Money Go?

30. Where Does the Money Go?

31. Healthcare Triangle Cost Access Quality

32. Quality • Defined • “…the degree to which health services for individuals and populations increase the likelihood of desired health outcomes and are consistent with current professional knowledge” (Institute of Medicine) • “…doing the right thing at the right time in the right way for the right person and having the best results possible.” Agency for Healthcare Research and Quality) • Clinical quality vs. consumer satisfaction • Structure, Process, Outcome measures

33. Access • “An individual’s ability to obtain medical services on a timely and financially acceptable basis.” (Jonas & Kovner) • Influences • Availability of facilities and transportation • Hours of operation • Ability to pay

34. Healthcare Triangle Cost Access Tradeoffs Quality

35. Take-Away Points • Many stakeholders in the U.S. system, each with its own interests and incentives. • Increasing costs across all segments over time, with market-based and regulatory factors contributing to the degree of growth in each. • Many expensive conditions to treat are chronic (long-lasting) rather than acute, and some are directly related to lifestyle choices. • There are tradeoffs between cost, quality, and access.

36. Small Group Discussion • Name 3 stakeholders (other than patients) in the healthcare marketplace that are likely to be affected significantly by the Democratic and Republican presidential health reform proposals. • What stakeholders are the biggest winners under each parties blank? • What stakeholders are the biggest losers under each parties blank?

37. Break

38. Future Healthcare Market Trends • Integrated history of the 20th century healthcare marketplace • Market linkages • Key issues for the 21st century • Demographics • Health & lifestyle • Behavioral choices • Chronic illness • Technology • Clinical technologies • Administrative technologies • Confronting key issues: U.S. health system reform

39. Healthcare Marketplace Hospitals Physicians Insurance Consumers Medical Device Long-term care Employers Government Pharma-ceuticals IT

40. 1900-1910 • Flexner report results in redefinition of medical education • New technologies (e.g., radiology) and pharmaceuticals (e.g., Salvarsan 606) • Federal government involvement in pharmaceuticals • Poison Squad • Pure Food and Drug Act • Long-term care provided in “rest homes”

41. 1910-1920 • World War I • Antiseptic medicine reducing in-hospital mortality rates • 1st attempt at National Health Insurance under Wilson administration

42. 1920-1930 • Great Depression (1929) • Hospitals and doctors underutilized because unaffordable to many • Origin of Blue Cross in Baylor, TX (1929) • Proliferation of pre-paid group practices (e.g., Kaiser, Group Health of Puget Sound) • U.S. Food and Drug Administrations (FDA) is created (1930) • Veterans Administration (VA) Health Care System formed (1930)

43. 1930-1940 • AMA waged war on hospital-based group practices and other organized systems perceived to be “socialized medicine” • Philanthropists and New Deal legislation subsidize academic medical centers and other hospital construction • Hospitals and doctors continue to face underutilization due to poor economic conditions • Federal Food, Drug and Cosmetics Act passed (1938) • Sulfa drugs discovered to treat conditions like pneumonia • 2nd attempt at National Health Insurance legislation

44. 1940-1950 • World War II • Development and use of antibiotics like penicillin • Hill-Burton Act of 1946 for hospital and nursing home construction • Proliferation of employer-sponsored health insurance due in part to wartime wage freezes • McCarran-Ferguson Act allows health insurance to be regulated at the state, rather than the federal level • VA growth • 3rd attempt at National Health Insurance legislation

45. 1950-1960 • Post-WW2: national income increasing • Massive increases in federal support for medical research • Fee-for-service medicine and patient-driven competition by hospitals and physicians • Employer-sponsored health insurance expansion with Revenue Act of 1954

46. 1960-1970 • Genetics research begins (1962) • Health manpower legislation for educational subsidies (1964) • Medicare and Medicaid passage as compromise to national health insurance under Johnson administration • Significant effect on hospitals and physicians • Shift from rest homes to nursing homes for long-term care • Harris-Kefauver Drug Act • Promotes competition in pharmaceutical industry

47. 1970-1980 • Medical arms race • Passage of the Health Maintenance Organization (HMO) Act of 1973 • Hospital inflation growing rapidly under cost-based or retrospective reimbursement • Passage of Certificate of Need laws at the state level; rate setting by state governments; creation of state and local health planning agencies • Employee Retirement Income Security Act (ERISA) (1974) passes and exempts plans run by unions and single employers from state regulation • Nursing homes become more widely available • Nixon proposes National Health Insurance, but legislation does not get passed

48. 1980-1990 • Public health crisis (HIV/AIDS) • Double-digit inflation creates impetus for Medicare Prospective Payment System (1983) • Technology and incentives create a shift from inpatient to outpatient care • Waxman-Hatch Act passes to promote competition by generic drugs in the pharmaceutical market

49. 1990-2017 • Public health issues • Increasing rates of obesity (30% by 2002) • Diabetes prevalence such as diabetes grow • Clinton Health Security Act legislation fails (1993-94) • Managed care penetration increases • Selective contracting and shift to payer-driven competition • Significant entry and exit in the Medicare HMO market. • Medicaid managed care

50. 1990-2017 • Provider consolidation • Record mergers and acquisitions by hospitals and physician groups • Managed care “nightmare” • Balanced Budget Act of 1997 • Cuts Medicare payment rates • Nursing shortages • Pharmaceuticals • Medicaid prescription drug rebates imposed (1991) • PBMs • Direct to Consumer advertising permitted (1997) • Medicare Part D (2006)