Medical Economics
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3 causes for rising
costs: fee-for service pricing, redistribution of dollars away from doctors and
hospitals to drug and device manufacturers, and the medical liability crisis
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85% of Americans have health insurance. 60% obtain health
insurance through their place of employment or as individuals, and government
agencies provide health insurance to over 25% of Americans. In 2005, 46.6
million (16%) Americans were without health insurance.
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The share of
workers who receive health insurance from their employer has fallen from almost
70% in the late 1970s to around 50% today. In the past five years, the percent
of businesses offering medical benefits has fallen from 70% to 60%, with the
steepest decline among small firms and those employing the low-skilled.
o Only 50% of small
businesses now offer health insurance, down almost 10 percentage points since
2000.
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Employer-provided
health coverage for retirees, once common, has shrunk, although
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Since most bills
are paid by a third party (the insurance company or the government), neither
patients nor doctors face real pressure to control costs. Overall, Americans
pay only $1 out of every $6 spent on their health care out of their own
pockets. Doctors are generally paid for individual services and so have an
incentive to perform too many procedures. The huge tax subsidies for
employer-purchased health insurance encourage expensive care. Rapacious lawyers
and the risk of being sued exacerbate the tendency towards unnecessary
“defensive” medicine.
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Harry Truman
wanted to create a system of national health insurance in the 1940s. When
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Soaring
health costs are placing pressures on employers and employees alike. In recent
weeks, companies like Wal-Mart have joined labor unions and consumer groups in
coalitions espousing universal coverage.
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New radiation
machines for cancer or operating rooms for heart surgery are profit centers for
hospitals, for instance. Once a hospital installs a new catheter lab, it has a
powerful incentive to refer more patients for the procedure. It's a classic
case of increased supply driving demand.
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Evidence-Based
Medicine is being used to
evaluate the cost-effectiveness of treatments.
History
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1940s: During the second world war
businesses, limited by wage controls, used health insurance as a way to hire
new workers.
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1965: Medicare and Medicaid are
passed by Congress
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1993-1994: President Bill Clinton
attempted a major reform of US health care but was unable to get the
legislation passed by Congress.
Recent developments
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George Bush
proposes replacing the $200 billion tax subsidy for employer-purchased health
insurance with a standard (and limited) deduction for everyone who buys
insurance. His budget also cuts $70 billion from Medicare, including payments
to providers and raising premiums for high-income beneficiaries
(means-testing).
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Pete Stark, the
top man on health in the House of Representatives, wants to move
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The debate in
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Unions and
business groups are also demanding action. Lee Scott, head of Wal-Mart, the
world's biggest retailer and a company often pilloried by the political left,
recently joined forces with Andy Stern, a top union leader, to push for
universal health coverage by 2012.
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Health Care
The Uninsured
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The number of
uninsured in the
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The majority of
the uninsured are employed young adults. 43% are not
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In practice, the
uninsured get emergency care at hospitals’ emergency rooms,
which is paid for by higher premiums for everyone else.
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- From July 2007
every resident must have health insurance, or face a $1,000 fine. People
with incomes up to three times the federal poverty threshold (almost
$60,000 for a family of four) will get subsidies to buy insurance. Firms
with more than ten workers must offer employees a health plan or pay the
state a “contribution” of up to $295 per employee. A new clearing house,
the “Commonwealth Connector”, is designed to offer more
choice and cheaper plans for those outside big firms. People in
this “Connector” will be able to offset their health insurance against
tax, a perk until now available only to employers.
- Source: “The Federalist Prescription”, The Economist, 1/11/07
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The American
Medical Association wants coverage for low-income people and children to be
expanded incrementally in the short term. In the long term, the AMA seeks a
market-based plan that uses tax credits and insurance market reforms to boost
coverage.
Private
Healthcare Financing
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Source: “Fresh
Pain for the Uninsured”, Businessweek,
11/21/07
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Patients pay $250 billion in medical expenses out of
their pockets. The figure could hit $420 billion by 2015.
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When they don't get paid immediately, hospitals and
physicians typically recover around 10¢ on the dollar owed, even when they hire
collection specialists.
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Providers are patient accounts wholesale to finance
companies, banks, credit-card companies, and even private equity firms. Many of
these third parties use credit scores and risk-analysis software to price the
debt and impose interest rates as high as 27% on past-due bills.
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General Electric finance CareCredit
card to dentists, plastic surgeons, and some hospitals, with loan volume
expected to hit $5 billion this year, up 40% from 2006. Citigroup and Capital
One now offer similar cards.
o The GE card typically
comes with an introductory 0% interest rate, but if a payment is missed, the
rate can leap to 26.99%.
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About
80 percent of the medical loans that CareCredit
provides are paid off on schedule and incur no finance charges, according to
the company’s president, Michael J. Testa. That, the
companies say, justifies the high default interest rates for late payments,
since that is the way they recoup the costs of doing business.
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The zero-interest
plans are are available only to the creditworthy and typically
are due within 12 months. Otherwise, the loans after defaults can carry
interest rates of 20 percent or more.
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For
people who think they could not pay off a zero-interest loan within a year,
most credit companies also offer longer-term medical financing deals with 12
percent to 13 percent interest payable over several years. Those plans, though,
must be arranged at the outset of the medical expense; a zero-interest plan
typically cannot be converted to the longer-term program
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Credit
companies make money even on the interest-free deals, because they are typically
keeping 10 percent of the fee the doctor charges the patient.
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On customers
who are good credit risks, the lender’s commission might be only 4 percent to 5
percent. But for patients with low credit ratings, a the
commission may be as high as 75 percent.
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Source:
“Doctors Offering No-Interest Loans to
Patients”,
Hospitals
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Lawmakers and the IRS are investigating whether nonprofit
hospitals provide sufficient free care to the uninsured to warrant more than
$50 billion in annual tax breaks.
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Courts have
ruled that hospitals can qualify as tax-exempt under Section 501(c)(3) of the
U.S. tax code if they simply provide health care, don't blatantly deny care and
don't have shareholders who reap profits - no matter how little charity care
the hospitals actually provide.
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In 2001 the IRS
said hospitals have to provide only limited community benefits, such as
accepting Medicare and Medicaid patients, to qualify for total exemption.
Hospitals do not even have to operate an emergency room to qualify.
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The General
Accounting Office found that 57% of non-profit hospitals provided less charity
care than the tax benefits the hospitals received.
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Joint Commission on the Accreditation of
Healthcare Organizations (JCAHO)
Hospital
Systems
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Ascension Health is the
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In the
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HealthSouth is also the leading
provider of rehabilitation services.
Convenient Care Clinics
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“Convenient care” clinics
have opened in shopping malls and inside pharmacies, and are open odd hours and
on the weekends.
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CVS,
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They typically charge
$50 or $60 for a visit, half or less of what it would cost to consult a doctor
and a quarter of the cost of a visit to an emergency centre. In recent months
American insurance companies and even Medicare (the government health-insurance
scheme for the elderly) have decided to extend their coverage to retail
clinics.
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Some of these clinics
are staffed by doctors. But others use nurse-practitioners.
Private Health
Insurance
Blue Cross Blue Shield
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The Blue Cross and Blue Shield Association is the
national trade organization that links 38 independent regional health insurance
companies.
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Based in
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Though historically "Blue Cross" was used for
hospital coverage while "Blue Shield" was used for medical coverage,
in most of the country one insurer operates under both brands.
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In 1929
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The cross symbol was first used in a 1934 advertisement
for the Hospital Service Association, today known as Blue Cross and Blue Shield
of Minnesota, and the Blue Cross began to be used in other parts of the
country.
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In 1939, the American Hospital Association began using
the Blue Cross symbol to signify that health plans across the country met
certain standards. The AHA continued to administrate the use of the symbol
until the Blue Cross Association was founded in 1960. The two organizations
remained affiliated until 1972.
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Another health plan gained popularity in the lumber and
mining camps of the Pacific Northwest that provide medical care by paying
monthly fees to medical service bureaus composed of groups of physicians. The
first of these, Pierce County Medical Bureau in
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The shield symbol was created in
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In 1948 the symbol was informally adopted by nine plans
called the Associated Medical Care Plans, and was later renamed the
National Association of Blue Shield Plans.
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Blue Cross and/or Blue Shield insurance companies are
franchisees, independent of the association (and traditionally each other),
offering insurance plans within defined regions under one or both of the
association's brands.
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Blue Cross-Blue Shield insurers offer some form of health
insurance coverage in every
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The 14-state WellPoint is the
largest Blue Cross-Blue Shield member, and is a publicly-traded company. Other
multi-state organizations include CareFirst in the
Mid-Atlantic and The Regence Group in the
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They also act as administrators of Medicare in many
states or regions of the
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Many plans are administered by not-for-profit
organizations, while others are for-profit companies.
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Aetna is the descendant of Aetna Insurance Company, of
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In 1998, Aetna bought NYLCare
Health Plans for $1.05 billion, and in 1999 it bought Prudential HealthCare for
$1 billion, making it the largest provider of health benefits in the
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In 2002, Aetna agreed to streamline communications,
reduce administrative complexity, and improve the quality of the health care
system, ending litigation between
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In 2005, the company had $1.1 billion in earnings and
15.8 million medical members
CIGNA
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Philadelphia-based CIGNA is the oldest stock insurance company in the
