PUBPOL 2350 Prelim 1

The Iron Triangle of Health Care

- high quality, broad access, low cost

- hard for any country to excel in all 3 at the same time

GDP

total $ value of every good and service a country produces, shows how much the country can spend

US vs other countries health spending gap

since 1980, the gap has widened

US access

- a problem, especially for lower-income people

- 8% of US pop was uninsured in 2021, whereas 100% of people in most other high-income countries have health insurance

US trends in triangle

- high cost, low access, low quality care

- really somewhere in the middle

inconsistent quality (w/in US health care system)

a. high spending creates very strong incentives for medical innovation

b. for complex (expensive) medical care, U.S. system is arguably the best in the world

c. US fares worse with primary care, preventative care, and coordination of care across sites/providers

inefficient spending (w/in US health care system)

a. as much as 30% of US spending goes to low- or negative-value medical care (money shouldn't have been spent)

b. the shift from fee-for-service to value-based care has been slow, with mediocre results

c. can we maintain innovative incentives with much lower prices/spending?

unequal access and outcomes (w/in US health care system)

a. many insured, high-income consumers have excellent access to (usually) high-quality care

b. under-insured, uninsured, and low-income consumers often do not

c. substantial inequalities in access, quality, and outcomes across racial/ethic groups, income levels, and geographic levels

how is a person health produced?

by many inputs, including medical care; social determinants of health are very important; average length and quality of life

social determinants of health

- the conditions in which people are born, grow, live, work and age which are shaped by the distribution of money, power, and resources

- include income, education, employment, housing, neighborhood conditions, transportation systems, social connections, and other social factors

underlying structural factors

- e.g., federal/state education policies

- affect the distribution of resources across the population and a person's position in society

- affect the "downstream" conditional of a person's daily life (which in turn affect health)

life expectancy vs. income in the US

the richest American men live 15 years longer than the poorest men, while the richest American women live 10 years longer than the poorest women

What was the main reason life expectancy improved in England and Wales from 1750 to 1850?

- economic growth and nutritional improvements made children more resilient to diseases which increased life expectancy at birth by about 4 years

- high infant mortality rate was due largely to rampant infectious diseases

argument for importance of nutrition

1. average adult height increased by 10 cm in Europe during the 18th century

2. mortality is U-shaped in a person's body mass index

3. direct impact of nutrition (medical care and public health are not likely to explain mortality reductions before 1850)

What was the main reason life expectancy improved in England and Wales from 1850 to 1950?

- public health programs: improvements in sanitation which helps younger people avoid infectious diseases

- macro (big works projects; ex. filtering water) + micro (people's behavior; ex. washing hands) = incredible change

- water and food-borne diseases essentially eliminated in high-income countries by 1970

What was the main reason life expectancy improved in England and Wales after 1950?

- medical care started contributing meaningfully to health improvements in the mid-1930s

- ex. very expensive neonatal care units greatly improve life expectancy of low-birthweight babies

leading determinants of health

- NOT medical

- individual behavior is the lead determinant of 36% but only $260 billion is spend to address health issues compared to $3337 billion spent on medical care (only 11% contribution)

National Health Expenditures

- the total amount of all spending in the US on medical care in 2021

- $4,255 billion ($4.3 trillion)

Personal Consumption Expenditure

personal health spending from our personal income; very unequally distributed

NHE vs. Personal Health Care Consumption Expenditures

NHE exceeds medical care personal consumption expenditure because the latter excludes research spending, investments, and net exports

where does the majority of medical spending go to?

hospital and physician care

growth in health spending per capital has

slowed down substantially in the last three decades, but NHE has increased as a % of GDP over time

consequences of increased medical spending

growing medical costs and growing health insurance premiums cut into workers' wages

what causes the persistent growth of US health care spending?

1. technology/innovation: development of new medical technologies (CATALYST)

2. insurance: expansion of public insurance programs to pay for them

3. Fee-for-service reimbursement: physicians and hospitals are paid to "do stuff" rather produce health, so they are usually eager to adopt new medical tech

4. cost sharing: patients don't face the full price of medical care at the point of care, so they are usually willing to use the new technologies

medical care

the goods and services that a patient receives when seeking treatment (ex. MRI tests, prescription drugs)

proportional causes of growth in per capita medical spending

tech 38%, income 37%, insurance 11%, aging 9%, prices 8%

medical care ratio

a key ratio for a health insurer

(enrollees' medical expenses)/(premium revenue)

sources of medical spending

private insurance 34%, medicare 25%, medicaid 21%, out of pocket 12%, other 8%

medicaid

Federal program that provides medical benefits for low-income persons (some disabled)

medicare

A federal program of health insurance for persons 65 years of age and older

capitation

- hospital gets paid whether you come in or not; opposite of fee-for-service

- more incentive to provide preventative care

- generally leads to less care provided, but patient normally just as well or better than fee-for-service patient

medical spending formula

(quantity of medical care)(price) + admin costs

possible drivers of increasing medical spending in the US

- quantity of medical care (underlying health, health behaviors, cost sharing, queues)

- price (# of payers/insurers, role of private market, regulation, political decisions, technologies)

- admin costs (# of payers/insurers, rules for MDs and hospitals)

US quantity of medical care

relatively low number of hospital admissions, physician office visits, and number of prescription drugs per capita

US prices of medical care

- MUCH more in the US on average, due in large part to greater use of expensive technologies

- drug prices in the US are about 2.5 times higher than in peer countries

Why is US health care more expensive than other countries?

1. US prices are high

2. multiple insurers (creates complexity and high administrative costs)

3. ability to pay (higher ability to pay for health care in US leads to more spending on health care

4. limited rationing (US does not ration expensive medical technology)

Quantity of Medical Care in US

- US is middle of the road in health

- relatively low number of hospital admissions and physician office visits, and number of prescription drugs per captia

Price of Medical Care in US

- hospital admission costs are much more in the US on average

- due in part to greater use of expensive tech

- physician fees/prices are higher in the US than other countries

- physicians earn much more but carry more educational debt

- drug prices in the US are about 2.5 times higher

Admin Costs of Medical Care in US

- multiple health insurers in US creates greater complexity and higher administrative costs

Value of a Year of Life

- dollar value of a single extra year of life

- dollar value of improvements in the quality of life

Monetary Value of a Year of Health

$100,000 as an estimate of the value of one extra year of life in perfect health in the US

QALY Defined

one year of perfect health is considered to have a Quality-Adjusted Life Year (QALY) value of 1.0

Health Condition Impact

a medical condition can reduce a person's health and quality of life, so it has a QALY value below 1.0

Medical Care Impact

medical care can increase the QALY associated with having a particular condition by ameliorating the symptoms of that condition

net value of medical spending

value of health gains in dollars - increased medical spending

health gains

a combination of increased life expectancy due to reduced mortality rates and improved quality of life (measured with functional measures, activities of daily life)

improved net value driven primarily by

lengthened life expectancy due to reduced mortality rates (rather than quality of life when they're alive)

How do countries decide whether a tech will be available in the country?

use a cost effectiveness threshold

cost effectiveness ratio =

(cost per patient w/ proposed drug - current cost per patient) / (expected QALYs 24 mo - expected QALYs 20 mo)

how do counties drive the price of technology down

by threatening to bar/restrict the technology

UK health system

allows/promotes (high-value) medical care when expected value of medical care > cost of medical care and restrict/reject (low-value) medical care when expected value of medical care < cost of medical care

Medical Technology in the US - Price Impact

medical treatments that are safe and improve health are usually approved for use, regardless of price

Medical Technology in the US - Government Influence

- almost always pays for tech that physicians/patients decide to use

- sets prices that physicians and hospitals receive for treating Medicare and Medicaid patients; include the cost of new medical tech

- does not directly determine the price of tech; allows manufacturers to pick a price and relies on competition to influence that price

Medical Technology in the US - Private Insurance

prices for medical tech are determined by "market forces": consumers pick health plans that do or do not cover various medical tech

two general methods of limiting growth in medical spending without reducing quality

demand side and supply side

demand side

- allow private insurers to restrict access to tech if their customers agree

- ask patients to pay a substantial amount of the price of medical care

- let consumers/patients choose which tech are valuable

- "self-rationing," the US favored method currently

supply side

- government chooses which tech are available; pay only for high-value tech

- gov negotiates/sets low prices

- "payer-rationing" the European favored method

spending differences in the US

- not driven by underlying health of the population or preferences of care

- no relationship nationally between spending and quality

- if Medicare spending is high in a region, it's because people are getting more medical care in that region

The "Dartmouth Group" Explanation

1. lack of scientific evidence to guide many clinical decisions creates uncertainty for physicians (all areas) -->

2. when in doubt, patients and physicians believe that more care means better care (all areas) -->

3. physicians and hospitals are rewarded for being busy in a fee-for-service health care system (most areas) -->

4. in areas where there are plenty of speciality physicians and hospital beds, primary care and emergency MDs are more likely to refer patients to specialists; specialists then use expensive medical tech (KEY; differs across regions)

high-spending regions

have more capacity to provide care: more hospital beds, more teaching hospitals, and more physicians per capita than low-spending regions

Dartmouth Atlas Conclusion

- some regions have gone past the "flat part of the curve"

- eventually, more medical care could actually harm patients (unnecessarily exposing patients to infections/diseases in the hospital)

"Choosing Wisely" campaign

- trying to convince MDs to reduce their use of common tests and procedures that have little/no value

- an estimated 25% of US medical spending is wasted

- not succeeded yet

- different areas use tech more frequently and the patients using them may not actually need it

medical prices today vs 1950s

- prices are better

- US can do better by identifying and eliminating low-value, wasteful care

- not easy to do because it involves taking away physicians' income or hospitals' profits

conclusions on variations in medical spending

- large differences in the amount of medical care people receive and the cost of medical care between regions

- little evidence that health outcomes are better in high-cost regions, and they may actually be worse

what do higher costs appear to be driven by?

- greater availability of physicians and hospital beds in some areas

- uncertainty regarding the best way to treat patients (present everywhere)

- belief that more care is better, combined with financial incentives for MDs and hospitals to do more (present in most areas)

What a Private Health Insurance Company Does in US

patient cost sharing

- at the point of care; also referred to as out-of-pocket payment

- deductible (e.g., first $2,000 of medical care)

- co-payment ($20 a visit) or co-insurance (20% of prescription drug cost)

actual premium paid by the consumer =

pure premium + loading charge

Pure premium (or actuarially fair premium)

expected medical spending for a person or group of people with the same risk level (i.e., same age, gender, health conditions)

loading charge

- amount of money the insurance company charges in addition to the pure premium

- covers administrative cost, cost of establishing a network of providers, processing the medical claims/bills, marketing costs, profit

2 major benefits of health insurance

1. reducing risk is valuable to consumers (risk averse people are willing to pay a loading charge to avoid large swings from year to year in the money they have available for non-medical spending)

2. enables access (health insurance allows people to receive medical care that they otherwise may not be able to afford in years when they are very sick)

risk spreading benefits of insurance

- top 10% of users in a year account for 64% of medical spending

- every once in a while you will be part of the top 1% and other people will be paying for your expensive medical costs

premiums determined by 1 of 2 methods

1. experience rating (based on previous medical bosts or predicted costs; differ btwn people due to different levels of health)

2. community rating (same for all people regardless of medical conditions and lifestyle)

how premiums are set for most americans

- most non-elderly receive insurance through their employer

- employers are typically experience rated

- most health insurers community rate within a firm

- equity and subsidization (young, healthy workers subsidize older/sicker workers within a company)

moral hazard

if a health insurance company pays for all of a person's medical care, once a person gets sick, they may demand more medical care once it's "free"

exposure to cost

patients who have to pay the full price of medical care will only receive medical care when the value of a medical care is greater than the cost

inefficient care

patients who pay nothing or a small % of the cost will sometimes decide to receive medical care when value < cost

how to reduce/control moral hazard

patient cost-sharing

deductible

dollar amount per year (e.g., $3,000) that a patient has to pay before the insurer begins paying for any medical expenses

co-payment

fixed dollar amount (e.g., $25) a patient pays per physician office visit or per prescription

co-insurance

the insurer pays a percentage (e.g., 80%) of a bill and the patient pays the remainder (e.g., 20%)

- have co-insurance OR a co-payment, not both

out-of pocket maximum

- the maximum amount a patient would ever have to pay out-of-pocket (deductible plus all other co-pays and co-insurance payments) over the course of a year

- doesn't control moral hazard, but is necessary to protect patient financially

health insurers make 4 key decisions to manage/reduce their medical care ratio (MCR)

1. determine which providers to include in the network

2. determine how and how much to pay providers

3. "manage" the medical care provided to minimize low-value, high-cost care

4. set cost sharing rules when patient receives medical care (e.g., co-pay or deductible)

medical care ratio (MCR)/medical loss ratio (MLR) =

(enrollees' medical expenses paid by an insurer) / (premium revenue)

out of network vs in network

out (preferred providers) = insurance companies will not pay if you go to that hospital

in (non-preferred providers) = hospitals that agree upon lower costs

Health Maintenance Organization (HMO)

- smallest provider network

- no insurance for enrollees going out-of-network except for emergencies

- most aggressive utilization management

- may pay primary care MDs with capitation

Point of Service (POS)

like an HMO but with some out-of-network coverage

Preferred Provider Organization (PPO)

- broadest provider network

- smallest penalty for going outside of network

- least aggressive utilization management

network strategy for insurers to lower its MCR

insurer payments to hospitals (and all providers) vary greatly within markets -- contracting with low-price providers allows insurer to lower its MCR

Why do some health systems and physicians receive much higher payments from private health insurers than others?

1. a private health insurer negotiates with a provider regarding whether the provider will be included in the insurer's network, and how much the provider would be paid if in the network

2. providers who are valuable to an insurer's prospective enrollees will command higher prices (and will cause the insurer to raise its premiums). value driven by customers' perceived quality of provider and access/market share

3. insurers who are important to a provider's revenue/profits will pay lower prices (the provider's tradeoff). importance driven by insurer's share of provider's revenue and the provider's alternatives

determine how to pay providers

some HMOs pay primary care MDs with "capitation" rather than fee-for-service; many MDs prefer FFS

popularity of healthcare plans

- PPOs are most popular type of health plan

- only 12% of people are in HMOs

tactics to try to reduce the use of low-value medical services

1. require patients to initiate treatment with their primary care physician (i.e., gatekeeper model in an HMO)

2. require prior authorization before a primary care physician can refer a patient to a specialist, or for an expensive prescription drug

3. require pre-certification for a hospital admission

4. step therapy for drugs: patient has to fail on less expensive drug before being allowed to try the more expensive drug

5. require generic substitution for prescription drugs

6. deny hospital days that are deemed to be "unnecessary"

which is the fastest growing type of plan?

- high-deductible health plans (HDHP)

- consumers are now being asked to pay more at the point of care

- for PPO plans, 15% of people have to pay $6,000 or more for their deductible

key issues with increasing patient cost sharing

1. patients make medical choices

2. rationing care

3. evidence that patients make bad choices (reduce prescription drug use when increased cost sharing)

4. negatively affects their health

why do we have a predominantly employer-sponsored health insurance system?

- during WWII, there were serious labor shortages due to federal wage controls

- federal government decided that if employers offered health insurance, they weren't violating wage controls

- came about from actions of the executive branch during a time of war

employer-sponsored health insurance advantages

- equity: all workers who pick the same health plan pay the same price

- insurers charge low loading charges to employees at large employers

- employers have incentives to keep their workforce healthy and productive

disadvantages of employer-sponsored health insurance

- employers often cannot successfully pool health risk (especially in smaller firms and among self-employed)

- workers do not have the same employer throughout their lifetime

- some employers don't offer health insurance; it's expensive to buy insurance on one's own because loading charges are higher