Catch Me If You Can:
Hospitals, Physicians, and the
Game of Medicare Payment Policy
Department of Health Evaluation Sciences
University of Virginia School of Medicine
October 13, 2004
Rick Mayes, Ph.D.
Assistant Professor of Public Policy
Overview
This presentation examines:
1. Larger trends in the U.S. health care system,
generally, and in Medicare, specifically
2. Issues of specific concern to physicians and
hospitals
3. Medicare’s financial relationship with physicians
and hospitals and the controversy over increasing
market segmentation
2
Underlying Medical Inflation:
The Rise and Fall (and Rise Again?) of Managed Care
20.0%
18.0%
18.0%
16.0%
14.0%
12.0%
13.9%
14.0%
12.9%
12.0%
10.9%
10.0%
8.2%
8.5%
8.0%
6.0%
6.0%
5.3%
4.0%
2.0%
0.8%
0.0%
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Ye ar
Health Insurance Premiums
Overall Inflation
Workers' Earnings
Sources: Census Bureau, Kaiser Foundation, CMS, 2004.
3
Underlying Medical Inflation: Health Insurance Premiums
Since 2001, on average . . .
- 5 million fewer jobs now provide health insurance in the U.S.
- the avg. cost of health insurance premiums has increased 59%
(versus 10-12% in wages & general inflation)
- employee contributions for health insurance have grown:
by 57% for single coverage (total of $3,695 annually, 2004)
by 49% for family coverage (total of $9,950 annually, 2004)
avg. premium for family coverage ($14,565 projected, 2006)
- A growing proportion of the overall increase in premiums for
employers has been “shared” with employees, particularly
those in small businesses.
Source: Henry J. Kaiser Family Foundation/Health Research and Education Trust Survey of Employer Health Benefits, Health Affairs Sept./Oct. 2004.
4
Health Insurance Premiums & Declining Coverage
5
Health Insurance Premiums & Declining Coverage
6
Underlying Medical Inflation Affects Medicare Population
Beneficiaries' Monthly Medicare Part B Premium Increases
(2005 = $78.20/per month; $938.40 per year; 56% increase since 2001)
18.0%
17.0%
16.0%
14.0%
14.0%
12.0%
9.9%
10.0%
8.0%
8.7%
8.0%
6.0%
4.0%
3.0%
2.3%
2.0%
4.0%
1.6%
3.4%
2.2%
0.0%
2.8%
1.6%
2.3%
2.5%
n/a
0.0%
0.0%
1997
1998
1999
2000
2001
Year
2002
2003
2004
2005
General Inflation
Part B Premium Increases
Source: CMS Office of the Actuary, 2004.
7
Demographic Trends
Medicare's Enrollment in Millions (Projected ), 1970-2030
90
76.8
80
70
61.1
60
45.9
50
39.6
40
30
28.4
34.3
20.4
20
10
0
1970
1980
1990
2000
2010
2020
2030
Year
Source: Medicare Board of Trustees, 2003.
8
Actuarial Trends
Medicare's Hl Trust Fund Balance as % of Annual Costs (Projected ), 1990-2030
200%
150%
2003 Trustees' Report
100%
2004 Trustees' Report
50%
0%
1990
1995
2000
2005
2010
2015
2020
2025
2030
-50%
Year
Source: Medicare Board of Trustees, 2003, 2004.
9
10
Medicare’s new $534 billion Rx Drug Benefit
11
Tom Scully, former CMS Administrator
“I hate this whole G--damn system. I’d blow it up if I could,
but I’m stuck with it. If it were up to me, I’d buy everybody
private insurance and forget about it. Obviously that’s what the
Republican view is.
We ought to do the same thing we do for federal employees:
go out and buy every senior citizen a community-rated,
structured, regulated private insurance plan. Let them buy an
Aetna product, or Blue Cross products. That’s the Republican
philosophy.
Why should Tom Scully and his staff fix prices for every
doctor and hospital in America? Which is what we do.
- Personal interview with Tom Scully, Administrator, Ctrs. for Medicare & Medicaid Services, 2001-2003
12
The Failure of Medicare+Choice as a Model for Paradigm Change
13
Sources: Medicare Health Plan Compare database, CMS February 2003.
Issues of Concern for Physicians: Growing Practice Expenses
14
Liability Insurance Crisis in U.S.
15
Sources: New England Journal of Medicine and AMA, 2003.
The History of Medicare’s Relationship with Physicians
Growth in Volume & Intensity of Medicare Physician Services per Beneficiary
12.0%
9.7%
10.0%
9.0%
9.4%
7.6%
8.0%
6.5%
6.1%
6.0%
4.0%
3.7%
3.9%
Fee schedule and spending targets introduced
1.7% 1.5%
4.5%
3.5%
3.4%
2.0%
4.3%
1.5%
1.2%
0.2%
0.0%
-0.7%
-0.2%
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
-2.0%
Year
Sources: GAO analysis of data from CMS and the Boards of Trustees of the Federal HI and SMI Trust Funds, 2004.
16
The History of Medicare’s Relationship with Physicians
Average Annual Change in Medicare Spending for
Physician Services per Beneficiary, 1980-2003
12.0%
11.6%
10.0%
8.0%
6.0%
6.0%
4.4%
4.0%
2.0%
0.0%
1980-1991
1992-1997
1998-2003
Sources: GAO analysis of data from CMS and the Boards of Trustees of the Federal HI and SMI Trust Funds, 2004.
17
Issues of Concern for Physicians: Growing Practice Expenses
Change in the Cost of Providing Physician Services, MEI,
and Medicare's Updates of Physicians' Fees, 1998-2005 (GAO, 2004)
6.0%
5.5%
4.8%
5.0%
4.0%
3.0%
2.6%
2.8% 2.8%
2.2% 2.3%
2.4%
2.0%
3.0%
2.9%
2.7%
1.7%
2.0%
1.5%
1.5%
1.0%
0.0%
1998
1999
2000
2001
2002
2003
2004
2005
-1.0%
-2.0%
-1.8%
-3.0%
M edicare Economic Index
Physician Fee Update
Source: CMS, Office of the Actuary, 2004.
18
The History of Medicare’s Relationship with Hospitals:
Maximize Reimbursement First, Decrease Costs Later
Change in Costs per Case and
Hospital Revenue Flows from Private, Medicare, and Other Patients, 1986-2000
% Annual Change
15
10.9
10
10.2
8.6
6.3
4.7
5
1.7
1.6
2.0
0.5
0.9
0.5
0
-0.7
-5
1986-1992
Costs per Case
1992-1997
Private
1997-2000
Medicare
Source: Stuart Guterman (CMS)
Other Patients
Cost-Shifting “Hydraulic” for Medical Providers
130%
120%
B
B = C + Margin
Contribution
A
C
Cost Shift
110%
Cost
Payment-to-Cost Ratio
100%
90%
Shortfall
Margin
80%
70%
60%
50%
Above Cost Payers
Below Cost Payers
40%
30%
20%
10%
0
10
20
30
40
Percentage of Market Share
50
60
70
80
90
100
Physicians & the Role of Cost-Shifting
Relative Payment Level by Payer for Nine Common ED Codes
2.5
1.97
Payment-to-Cost Ratio
2.0
1.95
1.5
1.31
1.00
1.0
0.83
0.49
0.5
0.0
Medicare
Medicaid
FFS
PPO
HMO
Worker's
Compensation
Source: The Lewin Group, “The American College of Emergency Physicians (ACEP) Practice Expense Study,” for the
American College of Emergency Physicians, September 15, 1998.
21
Community Hospitals & the Role of Cost-Shifting
200%
180%
Private Payer Payment-to-Cost Ratio
160%
140%
120%
The correlation coefficient between
Private Payer Payment-to-Cost Ratio and
Medicare, Medicaid & Uncompensated
Care cost shift burden is 0.753
100%
80%
60%
40%
20%
0%
0%
5%
10%
15%
20%
25%
Medicare, Medicaid & Uncompensated Care Cost Shift Burden (in %) by State
Source:
The Lewin Group analysis of data contained in AHA TrendWatch Chartbook: Trends Affecting Hospitals
and Health Systems, 2001.
22
Ratio of Hospital Charges (List Prices) to Costs in the U.S.,
1993-2003
220%
211%
210%
200%
191%
190%
194%
196%
200%
186%
181%
180%
175%
170%
160%
167%
164%
159%
150%
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Year
Source: Glenn Melnick, “Uninsured Americans,” Hearing Before the Subcommittee on Health of the Ways and Means, U.S. House of Representatives, 108th Cong., 2nd Sess. (9 March 2004);
Professor Melnick’s testimony from the Center for Health Financing, Policy and Management, School of Policy, Planning and Development, University of Southern California.
Technical Note: Data are derived from the Medicare Prospective Payment System’s Impact File, Centers for Medicare and Medicaid Services (CMS, 2004), available at
http://www.cms.hhs.gov/providers/hipps/ippspufs.asp, last visited October 1, 2004).
23
Hospital Payment-to-Cost Ratio by Payer, 1980-2002
140%
131%
Private
130%
127%
125%
122%
119%
120%
118%
Ratio (in percent)
116%
115%
112%
110%
Medicare
101%
100%
97%
98%
98%
96%
94%
92%
90%
104%
91%
88%
97%
94%
96%
89%
83%
82%
80%
76%
Medicaid
70%
80
82
84
86
88
90
92
94
96
98
2000
2002
Year
Source: American Hospital Association’s Annual Survey of Hospitals (n=6,800 hospitals), 2004.
Pearson’s correlation coefficients:
1984-1997: Medicare and Private ratios: r = -.86
1984-1997: Medicaid and Private ratios: r = -.39
1980-2002: Medicare and Private ratios: r = -.74
1980-2002: Medicaid and Private ratios: r = -.59
24
Segmentation of U.S. Health Care System Increasing
Number of Independent Diagnostic Testing Facilities,
2000-2002
4,000
3,615
3,500
3,197
3,000
2,655
2,403
2,500
2,012
2,000
1,784
1,500
1,000
500
0
2000
2001
Year
2002
Entities
Locations
Source: MedPAC (June 2004)
25
Segmentation of U.S. Health Care System Increasing
Medicare Payments to Ambulatory Surgery Centers
(in $ Billions), 1993-2003
$2.5
$2.1
$1.8
$2.0
$1.6
$1.4
$1.5
$1.0
$0.6
$0.7
$0.8
$0.9
$1.0
$1.1
$1.2
$0.5
$0.0
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Year
Source: CMS, Office of the Actuary, 2004.
26
27
Cost-Shifting (or Cross-Subsidization)
• Perhaps best thought of as a lubricant within a
massive series of financial feedback loops
between:
- government (Medicare, Medicaid)
- providers (hospitals, physicians) and
- private payers (insurance companies,
employers, patients).
28
POLICY implications of the significant rise in physician-owned: ambulatory
surgery centers, specialty hospitals, and diagnostic imaging centers:
1.) prospects for improved quality, lower costs, and more professional autonomy
- not a new phenomenon (e.g., heart hospitals in London 1857, psychiatry clinics, ear
and eye hospitals, obstetrics & gynecology hospitals)
- Adam Smith and the advantages of specialization (e.g., pins and “focused factories”)
2.) financial impact on community hospitals: fair or unfair competition?
- “cherry picking” the best-insured private patients by, largely, for-profit entities
- “skimming” lower-cost, healthier Medicare cases within individual DRGs
- cardiac, orthopedic, radiological services: huge proportion of hospitals’ net revenues
3.) impact on communities’ overall access to care
- declining volume & smaller patient populations make charity care harder to provide
- vulnerability of emergency services, burn units, psychiatric facilities
- complicates doctor-hospital relationships (e.g. staff privileges, economic credentialing)
- can easily exacerbate the development of a multi-tiered health care system
29
Present & Future Concerns
• (1) The ultimate cost shift is both prevalent and
increasing in scope and degree: employers passing
on a larger and larger share of their increased
health care costs to their employees . . .
- higher monthly wage deductions and/or increased co-payments,
deductibles, out-of-pocket costs (especially for employees’ dependents)
• (2) Beyond this strategy, more and more employers
have simply stopped offering health insurance . . .
- (15% of the U.S. population is uninsured; 45 million individuals or the
aggregate population of 24 states, Census 2003)
30
Conclusion:
How much should the government pay medical providers?
TOM SCULLY: “My frustration is that you’re trying to be a
government contractor. Hospitals usually get about 50% of their
revenues from Medicare & Medicaid; doctors, on average,
generally come into practice getting roughly 30% or so from
Medicare & Medicaid.
So if you’re a doctor or if you’re a hospital, fundamentally a big
chunk of your business is as a government contractor. And your
expectation, I think, when dealing with the government—whether
you’re in the Pentagon or in health care—is boring consistency,
decent operating margins that don’t flop around. If you’re
Boeing, you don’t want to have a 25% margin one year and a
negative 2% the next year, right?”
- Interview with Tom Scully, Administrator, Ctrs. for Medicare & Medicaid Services, 2001-2003
31
Exit Questions
(1.) What do providers do (or have to do)
when each payer only wants to pay the
marginal cost?
(2.) Who is ultimately responsible for the
common good in a competitive market?
32