Healthcare Econ

How has the amount spent on healthcare in the U.S. changed, and what impact did the 2020 COVID-19 pandemic have on healthcare spending?

The amount spent on healthcare in the U.S. has risen dramatically. Particularly, the 2020 COVID-19 pandemic played a significant role in this increase. Currently, nearly 1 in every 5 dollars in the U.S. is spent on healthcare.

What is GDP (Gross Domestic Product), and what does it represent?

GDP (Gross Domestic Product) is the total value of all goods produced and services provided in a country during one year. It serves as a measure of a nation's economic activity.

What is NHE (National Health Expenditure), and what types of goods and services are included in it?

NHE (National Health Expenditure) is the total value of health-specific goods and services provided in a country during one year. It includes items such as medications/drugs, labs/scans, healthcare research and innovations, and drug development, among other healthcare-related expenditures.

What was the per-person healthcare expenditure in the U.S. in 1970, and how has it changed over time?

In 1970, approximately $1,875 was spent per person on healthcare in the U.S. Today, this figure has increased to $12,531 per person, indicating a substantial rise in healthcare spending per capita.

What does Red, Blue and White indicate?

Red indicates the amount of healthcare people were utilizing.

Blue indicates the cost of healthcare at the time. 

White bands indicate periods of recession

What were the healthcare trends and changes during the 1990s, and how did the economic recession impact healthcare usage?

During the 1990s, there was a significant drop in healthcare usage due to the economic recession. Economic instability led people to forgo healthcare services, deeming certain components as non-essential. In response to rising healthcare costs, managed care plans gained popularity, aiming to limit unnecessary care, increase insurance companies' bargaining power for lower prices, and reduce the number of unnecessary tests (labs/scans). However, this era also saw an increase in administrative hurdles for accessing certain healthcare services.

How was healthcare spending distributed during the COVID-19 pandemic, and what were the percentages of spending for various healthcare components?

During the COVID-19 pandemic, a substantial portion of healthcare spending was allocated to inpatient care within hospitals. The breakdown of healthcare spending included:

• 20% on physician and clinic expenditures (Outpatient).

• 8% on prescription costs.

• 4.8% on nursing care facilities, which is expected to increase significantly due to an aging population. Notably, insurance typically does not cover this type of care.

How did the 2008 recession affect healthcare, and what were the significant changes in healthcare price and demand during that time?

The 2008 recession resulted in a notable decrease in both the price of healthcare and the number of people seeking healthcare services. Economic downturns often lead to reduced healthcare spending and lower demand for medical services.

What healthcare development occurred in the early-to-mid 2000s, and how did it impact patient choices regarding scans and treatments?

During the early-to-mid 2000s, the rise of PPO (Preferred Provider Organization) plans offered patients more choices in receiving certain scans and treatments. PPO plans allowed patients to select healthcare providers and services from a broader network, offering increased flexibility in their healthcare decisions.

How did the COVID-19 pandemic impact healthcare utilization, and what were the contributing factors to the significant drop-off in healthcare usage?

The COVID-19 pandemic led to a significant drop-off in healthcare utilization, primarily due to widespread shutdowns, stay-at-home orders, and other restrictive measures aimed at curbing the spread of the virus. These measures limited access to healthcare services and led to reduced healthcare-seeking behavior.

What factors contributed to the growth in healthcare spending from 2019 to 2020, and which areas experienced the most significant increase in spending?

The growth in healthcare spending from 2019 to 2020 was primarily driven by an increase in public health spending. This increase was influenced by factors such as federal and state/local public health spending campaigns. Notably, the areas that saw significant growth in spending included hospital expenditures, administrative costs, and physician and clinical expenditures.

LO: Understand the relationship between spending on healthcare and life expectancy

Despite high healthcare spending in the U.S., what concerning trends have been observed regarding childhood mortality and maternal mortality rates in comparison to other countries?

Despite significant healthcare spending, the U.S. has experienced a concerning persistence of childhood mortality rates when compared to other parts of the world. Additionally, the U.S. has sustained a higher maternal mortality rate since the 1990s, and there is a disturbing upward trend in maternal deaths. These issues highlight disparities in healthcare outcomes despite substantial financial investments in the healthcare system.

LO: Appreciate trends in who uses healthcare

What are the patterns of healthcare spending across different life stages, and how does gender influence healthcare spending?

High

High healthcare spending occurs in the first year of life and in the elderly years. The life expectancy of women is generally higher than that of men, which results in a higher average spending cost for women. Moreover, Medicare plays a significant role in covering healthcare costs for individuals above the age of 65, emphasizing its importance in healthcare spending and insurance for the elderly population.

What is the distribution of Medicare spending among beneficiaries, and how does it vary between different groups of beneficiaries?

Medicare spending is distributed unevenly among beneficiaries, with 10% of Medicare beneficiaries accounting for nearly 60% of the total cost allocated for Medicare spending. This higher spending is often due to inpatient hospital costs and increased treatment costs, as sicker individuals generally require more expensive care. On average, per capita Medicare spending is $10,584, but the top 10% of beneficiaries have an average per capita spending of $61,722, while the bottom 90% have an average per capita spending of $4,897.

What is the distribution of healthcare costs in the U.S., and how does it relate to the utilization of healthcare services?

Approximately 5% of the U.S. population utilizes 50% of the total U.S. expenditures on healthcare. Most people do not end up utilizing healthcare services or do not require them. However, when someone from this 5% experiences illness or health issues, they often require a significantly higher utilization of healthcare services, contributing to the disproportionate distribution of healthcare costs.

LO: Understand how we pay for healthcare.

A large percentage of healthcare payment is coming from insurance.  (Private health insurance, medicare, medicaid, etc…)

- Out of pocket costs are around 9%.

Government accounts for approximately 2/3rds of our insurance coverage

Private health insurance is often through employers or schools (for people under the age of 65).

How are healthcare payments typically facilitated, and what are the key intermediaries involved in healthcare payment processes?

Healthcare payments are often facilitated through intermediaries, which can be government systems or private employer networks. Government systems, including Medicare and Medicaid, play a significant role in providing healthcare coverage. Employers also contribute to healthcare payments by offering employee benefits, such as healthcare plans with premiums and perks, making healthcare financing a shared responsibility between public and private entities.

What is the overall trend in healthcare payment, and how do different age groups access healthcare coverage in the United States?

The overall trend in healthcare payment involves individuals over 65 utilizing public funding to pay for healthcare costs. Medicare provides coverage for people over 65. Medicaid is aimed at providing coverage for those from low-income backgrounds. On the other hand, individuals under 65 typically rely more on private insurance options accessible through their employers for healthcare coverage.

Understand how Medicare (for ages >65) is funded and future challenges

What is Medicare Part A, and how is it funded?

Medicare Part A covers hospital expenses and is funded through payroll taxes or contributions from working people through their employer. Reimbursement for medical services through DRG-based payments

What does Medicare Part B cover, and how is it funded?

Medicare Part B provides coverage for outpatient services and is funded through general taxes derived from various sources. These taxes contribute to a common pool of funds in the United States to support Medicare Part B coverage. Reimbursement/payment through a fee-for-service model.  

What does Medicare Part D cover, and how is its funding structured?

Medicare Part D covers prescription drug expenses and is funded through general taxes, similar to the funding mechanism for outpatient coverage under Medicare Part B.

• Reimbursement/payment through a fee-for-service model.  

What demographic changes are projected for the U.S. in the coming years, and what factors contribute to these changes?

It is projected that by the year 2034, older adults will outnumber younger adults and children in the United States. This shift is driven by an increased prevalence of the aging population, primarily due to improvements in health and a simultaneous decrease in birth rates in the country.

What challenges are posed by the increasing ratio of workers to beneficiaries due to longer life expectancy, and what are the current solutions being considered?

As people continue to live longer, the ratio of workers to beneficiaries in support programs like Social Security and Medicare continues to increase, putting financial strain on these systems. The current solutions being presented to address this challenge include either increasing taxes to fund these programs or reducing the benefits provided to beneficiaries

What is the expected trend in federal spending on Medicare and Medicaid, and what percentage of the federal budget do they each represent as of 2018?

Federal spending on both Medicare and Medicaid is expected to continue rising. As of 2018, Medicare accounts for 15% of the federal budget, while Medicaid makes up 11% of the federal budget.

What is Medicare Advantage, and how does it work? How does the increasing adoption of this option affect the costs for Medicare on government funds?

Medicare Advantage is a buy-in option that individuals can choose to cover more healthcare options. It involves the government approving plans with private insurance companies. The frequency of people choosing Medicare Advantage is increasing, which, in turn, drives up the cost for Medicare on government funds.

What are the primary sources of healthcare spending in the United States, and who funds it?

The majority of healthcare spending in the U.S. flows through insurance. Approximately half of healthcare spending is government-funded, including programs like Medicare and Medicaid, and the other half is covered by employer-based private insurance plans.

What makes healthcare spending different from other types of spending, and why is it often more challenging to understand compared to purchasing everyday items like meals or clothing?

Healthcare spending is distinct from other forms of spending because it involves purchasing intangible services, treatments, and medical care rather than tangible goods like meals or clothing. This complexity and the technical nature of healthcare can make it more challenging to comprehend and navigate for consumers.

In the context of healthcare, what does it mean for pricing to be inelastic?

In healthcare, "inelastic pricing" refers to a situation where the price of healthcare services or medical treatments does not significantly change in response to shifts in supply and demand. Inelastic pricing can result in healthcare costs remaining relatively stable even when there are changes in factors such as the number of patients seeking care or the availability of healthcare services.

What is the Law of Demand, and how does it describe buyer behavior in relation to price changes?

The Law of Demand states that as the price of a good or service decreases, the demand for that item increases. In other words, there is an inverse relationship between price and demand, with lower prices leading to higher demand from consumers.

What is the Law of Supply, and how does it describe seller behavior with regard to changes in price?

The Law of Supply states that how sellers behave in response to changes in price. When the price of a product increases, sellers are more likely to provide and increase the supply of that product because they can sell it for a higher price. In other words, there is a direct relationship between price and supply, with higher prices leading to greater supply from producers.

Elective procedures have a….?

Changes in the price of service will produce a significant change in the demand for it.  High elasticity of pricing

Semi-elective procedures have a…..?

(Hip and Knee surgeries): Changes in the price of service will produce small changes in the demand for it.  Low elasticity of pricing

Emergency care (immediate life-saving care has a…."?

Changes in the price of service will produce no change in the demand for it.  Demand is inelastic to price

In emergency situations, what are the key decisions that patients may need to make, and how can hospital prices play a significant role in these decisions?

Even in emergency situations, patients may face decisions such as choosing between the nearest hospital with suboptimal care and out-of-network pricing or a farther hospital with better quality care that's covered by insurance. Hospital prices can be a crucial determining factor for patients when making choices regarding their care options, particularly when dealing with emergency medical needs.

Identify features of healthcare that lead to asymmetric information and its impact on spending practices.

What is Asymmetric information?

• Asymmetric information: “Lemons” of healthcare.

  • Patients don’t know what they’re buying.  Just like buying a “lemon” of a used car (car has unreported damage/doesn’t work as advertised/hidden costs).

Will Consumers of healthcare services (patient) will have less or more information than the provider with regards to healthcare options and costs. 

Less

What are some solutions to Asymmetric information?

CMS (Center for Medicare and Medicaid) 5-star quality rating system.

Price transparency

What challenges do healthcare consumers (patients) often encounter, and why is there an information gap between them and healthcare providers?

• Unnecessary tests and treatments that the physician may recommend that are not necessarily needed. 

• Deciding what the most appropriate therapy is (e.g. cancer therapies) and weighing the cost vs benefit analysis for both cost and therapeutic advantage.  

• Ascertaining the quality and type of care.  The level and type of care received depends on both the physician and hospital.  Providers know more about “who’s better” as an option. 

• Pricing for the same procedures and treatment can differ wildly from institution to institution.  How much the treatment/procedure will cost is usually not clear to patients.

What is the CMS 5-star quality rating system, and what metrics does it consider to assess the quality of healthcare services?

The CMS (Center for Medicare and Medicaid) 5-star quality rating system is a government initiative aimed at ensuring that patients covered under their insurance receive quality care. This rating system assesses healthcare quality by looking at various metrics, including timely and effective care, complications and death rates, unplanned hospital visits, psychiatric unit services, and the payment and value of care provided to patients.

Why is price transparency considered an essential initiative in healthcare, and how can it benefit patients? What limitations still exist in healthcare pricing despite these efforts?

Price transparency in healthcare is crucial as it enables patients to easily access price information for various procedures and treatments. This information helps patients make informed decisions about where to receive care. However, it still doesn't account for unexpected complications, and healthcare pricing remains challenging to predict ahead of time, highlighting the complexity of the healthcare pricing landscape.

LO: How does risk pooling have an impact on the cost of healthcare (specifically the cost of health insurance)

What is the primary role of health insurance, and how does it function in terms of risk?

Health insurance serves to shift the risk of injury or illness from the individual onto a larger group of individuals who contribute to the insurance pool and the insurance company. This risk-sharing mechanism helps individuals mitigate the financial burden of healthcare costs in the event of injury or illness.

What is adverse selection in the context of insurance, and can you provide an example of mandated insurance?

Adverse selection refers to an applicant obtaining insurance at a cost that is lower than their actual level of risk, potentially leading to imbalanced risk pooling. An example of mandated insurance is auto insurance, where everyone must purchase it, ensuring that the risk is pooled across a larger group of individuals. This helps prevent adverse selection and ensures that all drivers share the risk of potential accidents.

In the historical context, has health insurance been optional, and what challenges can arise when it is optional, particularly in relation to high-risk individuals?

Historically, health insurance has been optional. When health insurance is optional, individuals who are more likely to get sick are more likely to purchase it. This can lead to the creation of a "high-risk" pool with higher premiums or, historically, exclusions from coverage due to pre-existing conditions. This issue highlights the challenges of adverse selection in the absence of mandatory health insurance.

What solutions did the Affordable Care Act (ACA) aim to provide for issues such as pre-existing conditions, cost-sharing reduction payments, and the individual mandate to buy health insurance?

The Affordable Care Act attempted to address these challenges by prohibiting the exclusion of pre-existing conditions from coverage, implementing cost-sharing reduction payments for health plans (though these payments have been halted currently), and enforcing an individual mandate to buy health insurance, even though the penalty for non-compliance effectively became $0.

What is a Segmenting Patient Risk Pools?

- Blended pool of low and high risk individuals reduces costs for high risk individuals.

- Allowing lower risk people to forgo insurance (or choose a cheaper option) will concentrate higher risk people into expensive healthcare premiums and make care less accessible. 

-Increased premiums will then drive even more low-risk people out to produce a “death spiral” by further concentrating high risk patients.

LO: Define moral hazard and cost-sharing in the context of healthcare spending. 

What is moral hazard in the context of health insurance, and how does it relate to the consumer's response to the out-of-pocket price for healthcare (cost-sharing)?

Moral hazard in health insurance refers to how consumer demand for healthcare services responds to the out-of-pocket price the consumer has to pay for that care. It relates to how individuals may use more healthcare services when they have reduced financial responsibility due to health insurance, potentially leading to increased healthcare utilization and costs

How much you pay for healthcare is directly linked to ..?

how likely you are to seek it out and use it.  For example, how likely would you be to go for a routine health maintenance visit?

• Without insurance: Not likely (unless something serious was happening)

• Insurance with a high co-pay: More likely to. 

• Insurance with no co-pay: Even more likely to.

Healthcare Economics: What makes up the insurance payment. 

• Deductible:  You pay this initial portion of your healthcare costs.  Oftentimes a trade-off for a lower monthly premium. 

• Co-insurance:  You pay a certain amount or percentage per service.

• Catastrophic coverage: Anything above a certain amount is fully covered.  

Each of these insurance portions can influence how and when people will choose to seek out healthcare.

What is a deductible in the context of health insurance, and how does it relate to the trade-off for a lower monthly premium?

A deductible is the initial portion of healthcare costs that you, as the insured individual, are responsible for paying before your insurance coverage kicks in. Often, choosing a higher deductible can lead to a lower monthly premium, representing a trade-off between upfront out-of-pocket expenses and ongoing premium costs.

What is co-insurance in the context of health insurance, and how does it work?

Co-insurance in health insurance refers to the amount or percentage that the insured individual is responsible for paying for each healthcare service or treatment. It represents a shared cost-sharing arrangement between the individual and the insurance provider.

What is catastrophic coverage in the context of health insurance, and how does it work?

Catastrophic coverage in health insurance is a type of coverage where anything above a certain predetermined amount is fully covered by the insurance plan. It is typically designed to protect individuals from extremely high and unexpected medical expenses, offering financial security in the event of a major health crisis.

What is the RAND Health Insurance Experiment, and what was its primary focus during the 1970s?

The RAND Health Insurance Experiment was a study conducted in the 1970s that aimed to investigate how individuals seek healthcare in relation to the amount of money they needed to contribute through cost-sharing, which represents out-of-pocket expenditures for insurance purposes.

What is the Oregon Health Insurance Experiment, and what was its primary focus in 2008

This evaluation was performed through a limited expansion of Medicaid determined via a lottery system. The study compared the outcomes of individuals enrolled in this Medicaid expansion program to those who remained uninsured to understand the effects of Medicaid coverage on healthcare access and outcomes.

Oregon Health Insurance Experiment Resulted was

Increased use of healthcare resources

• Reduced financial strain and instability.

  • 40% decrease in reports of borrowing or skipping payments for medical expenses. 

  • 25% reduction in unpaid medical bill

• Improved health outcomes. 

  • Increase in preventive care usage

    • 60% increase in people receiving mammograms. 

    • 20% increase in cholesterol screenings

  • Increase in self-reports of good health. 

What did the RAND Health Insurance Experiment determine?

• They demonstrated that increased cost sharing resulted in decreased spending on healthcare expenditures. 

  • Those with higher cost sharing made fewer medical visits and admitted less frequently.

  • Decrease in spending was due to reduced visits (not reduction in care costs).

  • Reduced visits for both effective and ineffective medical services.

  • Cost sharing only had a detrimental impact on the health of sickest and poorest patients.

Review what types of healthcare each part of Medicare (for age >65) covers.

What is Part C of Medicare, often referred to as the Medicare Advantage Plan? How does it work, and what are some of its features and drawbacks?

Part C of Medicare, the Medicare Advantage Plan, involves privatized Medicare coverage through a contract with a private insurance company. It provides an optional opt-in plan that offers increased coverage for services that the original Medicare may not cover, along with additional benefits. However, one drawback is the limited network options for physicians and healthcare providers that individuals can see when compared to the original Medicare program.

LO: Understand DRG-based payments for inpatient care.

What are DRG-Based payment methods, and how do they work in healthcare reimbursement?

• DRG-Based payment methods, which stand for Diagnostic Related Group (DRG), are a payment system used to establish price points for various medical procedures and services. These payments are fine-tuned based on different factors such as comorbidities and complications associated with a specific procedure. In cases with multiple diagnoses, the highest reimbursed diagnosis is used to determine the DRG category. This payment method consists of a single payment for each hospital admission, irrespective of the length of stay or resource utilization. It is calculated by summing up the Procedure, Admitting Diagnosis, and the presence of Comorbidities (CC) or Complications/Major Complications (MCC).

What are some Drawbacks to DRG

• Drawback includes hospitals being motivated to reduce the length of stay for patients with medicare and increased provider burnout. 

LO: Understand fee-for-service payments for outpatient care.

How did the historical Medicare payment system for physicians work, and what were the options available to physicians in terms of participation?

In the historical Medicare payment system for physicians, physicians had the option to participate in Medicare. If they chose to participate, Medicare would set the fee for the service, and the physician would submit the bill to Medicare. Medicare would then pay 80% of the fee, while the patient was responsible for the remaining 20%.

For physicians who didn't choose to participate, patients could submit the bill to Medicare, but Medicare would only reimburse 80% of the Medicare rate, leaving the patient to cover the remainder.

This system operated under a fee-for-service model, where providers received more reimbursement for each visit and procedure they facilitated, incentivizing increased service provision.

How does the modern Medicare payment system for physicians work, and what are the key components involved in determining payments?

In the modern Medicare payment system for physicians, a Resource-Based Relative Value Scale (RVUs) has been used since the early 1990s. This system aims to standardize and reduce healthcare costs by ensuring that physicians receive similar reimbursement rates for the same services. The RVU of a service is determined based on three main components:

1. Work component: Reflects the time and skill required to provide the service.

2. Expense component: Accounts for the practice cost associated with providing the service.

3. Malpractice insurance: Varies across different medical specialties.

Under this RVU model, out-patient clinic work is often valued less than critical in-patient hospital care.

Physician fees are determined based on the RVU value of the service, with some adjustments made for factors such as geography and available resources. Payments are equivalent to the RVU value multiplied by a standard rate. Additionally, physicians who do not participate in Medicare are restricted from charging Medicare patients more than 109% of the Medicare rate.

In the modern Medicare payment system how are physicians fees determined?

Physician fees are determined based on the RVU value of the service, with some adjustments made for factors such as geography and available resources. Payments are equivalent to the RVU value multiplied by a standard rate. Additionally, physicians who do not participate in Medicare are restricted from charging Medicare patients more than 109% of the Medicare rate.

Recognize the difference between in-patient and out-patient payment.  

What is the payment structure for in-patient healthcare services, and how is it typically handled through the DRG (Diagnostic Related Group) system?

Through DRG, one lump sum payment for a particular procedure/treatment. 

How are outpatient healthcare services typically reimbursed, and what is the payment structure for physicians who see patients on a daily basis in an outpatient setting?

Through fee-for-service, each day the physician sees a patient, they are reimbursed for that work.

LO: Recognize lack of alignment in hospital and physician payments for inpatient care. 

Hospital system is rewarded for getting the patient out as soon as safely possible.  They get paid with a lump sum via Medicare for a procedure. 

• They can then fill that bed with another.

• Continue to make revenue off a single bed.

Physician reimbursement does not follow this model, they get paid through the number of visits and their labor (fee-for-service).

Misalignment is addressed through bundled payments.

What are bundled payments in the context of healthcare, and how do they function in the reimbursement model?

Bundled payments in healthcare involve a fixed price agreement for a predefined episode of care, where the hospital or healthcare provider acts as a general contractor. Instead of paying for individual services separately, this model bundles all the services and costs related to a specific episode of care into a single, predetermined payment. This approach is designed to encourage efficiency and coordination among healthcare providers and improve the overall value of care for patients.

LO: Understand how bundled payments aim to expand for an episode of care.

• Aims to reduce the number of different bills that the patient receives (less confusion). 

• Pays for the entire episode of care (full range of services, before/through/after surgery)

• Hospital allocates payment to each provider and department. 

• Requires the coordination of multiple bodies in the healthcare system.

• Standardization across the hospital for particular services, aims to reduce waste in unnecessary tests/labs.

• Established protocols will be important in ensuring evidence based medicine.

Bundled payments generally remain the..?

same regardless of resource usage.

• Physician groups will typically share in cost savings (encouragement to keep costs low)

• Entire system is aligned and incentivized to lower costs of care. 

 Bundled payment plans for joint replacements have shown..?

• Reduce cost of care without any changes in mortality/readmissions/ER visits

• Patient satisfaction is either improved or unchanged due to bundled payments. 

• One study showed a statistically significant decrease in cost from 26,000 to 21,000 for an extremity joint replacement due to Medicare bundled payments. 

• Preplanning through a bundled payment helps decrease the amount of time the patient needs to stay in the hospital (organizing rehabilitation/care plans/decisions ahead of time).

What are Accountable Care Organizations (ACOs), and what is their primary role in the healthcare system?

Accountable care organizations are groups of hospitals, physicians, and other providers that coordinate care for a population of Medicare patients. 

• Provide appropriate care at the appropriate site; Support staff and preventive clinic work to keep/prevent patients from having to be admitted into the hospital. 

• Incentivized to reduce costs for patients.

What are the Differing models of reimbursement for Accountable Care Organizations (ACOs)?

• Shared savings: If money is saved during the process, the ACO will keep some of that money (insurance doesn’t keep all of it)

• Bundled payments 

• Full capitation: An allocated quantity of money/payment for a specific patient that is paid for once per year by Medicare. 

  • Adjusted for risk factors for each patient

  • Incentivizes the hospital to keep that patient healthy so they don’t need to use these funds and can keep them.

Quality metrics and standards that ACO’s are held to by governing bodies to ensure a high quality of care.

What is the Oak Street Health case study

• High acuity Medicare patients from underserved backgrounds.

• Full risk-capitation plans

• Produced the following outcomes

  • 40% reduction in hospitalizations of managed care patients

  • 26% reduction in readmission

• Demonstrated the importance in preventative care in keeping patients out of the ER and hospital through outpatient clinic visits.