Discussion Question- Price is firm

Current System Issues and Their Impacts

Introduction

Before we can discuss change and innovation in our health care delivery system, a strong understanding of the current system is necessary, including how it functions, what types of incentives are at work, and how the different entities inside it work with and impact each other.

What Elements Drive Our Current System?

There are several key drivers of the existing system, and among these are the money, providers, payers, and consumers. When examining the behavior of any system, it is useful to look at the series of rewards and consequences that drive behavior. In health care, this means that much can be learned about the system's behavior by following the money trail. What things are reimbursed, under what circumstances, and with what outcomes? Under what circumstances are consequences, such as not getting paid, applied? In the current system, payments are highest for procedures, and proceduralists such as surgeons, gastroenterologists, and interventional cardiologists are all paid much higher fees than are family practice physicians, pediatricians, or hospitalists, all of whom manage medical care. Hospitals function under the same premise. Approximately 75% of the revenue for the average community hospital comes from surgeries, and another 12% comes from diagnostic imaging procedures. Additional amounts come from cardiac diagnostic and interventional procedures. So, approximately 90% to 95% of revenue comes from performing procedures on patients rather than providing management of diseases through medications or other noninvasive treatments. Thus, the system is focused on rewarding procedures that lead to "curing" and focused away from medical management of chronic diseases or prevention of disease and illness.

Financial Elements

Without doubt, money is one of, if not the, most powerful drivers of system functioning. For a classic example, we can look at the old fee-for-service payment methodology prevalent in the 1960s and 1970s, and contrast it with Medicare's implementation of diagnosis-related groups (DRGs) as a payment mechanism in 1983. Under fee-for-service health care, providers used whatever procedures, equipment, and supplies they felt were needed for care, and they submitted a bill that charged for each item. The payors received the bill, corrected any errors, and then issued a check for the corrected amount to the providers. If a provider wished to make a larger profit, they could provide more services or billable items to increase the payment. It comes as no great surprise to note that utilization of services and cost both rose rapidly under this methodology, since there was no incentive to be frugal. When Medicare changed its reimbursement to DRGs, the system began to experience the impact of being paid one flat fee, set by DRG, for the entire admission, regardless of how much care was rendered. For example, if a hospital provided care at a cost below the DRG payment, it was able to make a profit by keeping the payment left after costs were covered. On the other hand, if a hospital provided care that cost more than the DRG payment, it lost money. The risk is all on the hospital or other provider under a DRG model. DRGs are still the Medicare method of paying for care, and Medicaid entities use them also. Some private insurers are using a form of these, called case-rate payments. They are still flat fees for the episode of care. The goal of this methodology is to encourage providers to manage their costs downward. However, a consequence of this approach can be limiting some aspects of care for some patients. For example, not everyone would qualify for certain procedures; a patient with cancer may not qualify for a separate liver transplant if the cancer has spread inside the body, for instance. Providers may also choose to limit the types of drugs, procedures, and supplies they provide. For example, a pharmacy formulary may only allow two types of antibiotics for general use rather than the whole spectrum of available antibiotics.

Another financial methodology that was popular in the 1990s is called capitation. In this methodology, a health care provider would assume care responsibilities for a pool of patients. The insurer would pay the provider a monthly premium per member at a set rate, and the provider would provide health care services to members out of the premium pool of money. In some arrangements, there would be carve-outs for new technology or new pharmacology, which would add some reimbursement, but in general, all regular costs would be borne by the provider from the pool of premium dollars. The incentive in this model shifts from providing procedures toward managing care so as to decrease the demand for services. There are several consequences to a capitation model. If the goal is to decrease service demand, it imposes a type of rationing on which patients qualify to receive what services. Cost/benefit ratios for services are a frequent analytic tool in this model. For example, is there a higher cost/benefit ratio to provide $100,000 for immunizations, or is it better to use that $100,000 to provide a kidney transplant to a patient with end stage renal disease? Another consequence can occur from the makeup of the patient population in the pool. If the pool insures primarily younger and healthy patients, it tends to be very financially successful for the provider rather than a pool that is heavily weighted toward patients who have chronic diseases requiring multiple care interventions. The difficulty of managing care appropriately has made many capitation plans unsustainable for the long term.

In the current system of health care delivery, there is a mix of compensation models in operation, and this is a factor in the complexity of the system. There are still a few discounted fees for service payers, and these are highly valued by the providers in the system. The insurers may have negotiated significant discounts from billed charges, but they still pay for the items billed. There are also per diem types of payment contracts, which pay a set fee for each day the patient is receiving services. The fee may be relatively low per day, and this can encourage longer lengths of stay, since typically the highest costs per patient episode of care occur on the first one to two days of the stay, particularly for surgery patients. Preferred provider organizations may pay by case rate or per diem but typically have very steep discounts negotiated with providers. However, they also have rates that are negotiable rather than a "take it or leave it" approach, and they are more open to negotiating carve-out payments for special requirements, new technology payments, or new ways of providing care. Since the incentives and financial consequences for these various models are different from each other, it makes the financial management of health care very difficult. There is currently no standard way of managing care, costs, and expenses across financial models, other than the governmental payors for Medicare and Medicaid. Hospitals juggle costs across payors and negotiate higher rates with commercial, fee-for-service and per diem payors to offset the losses from Medicare, Medicaid, and patients with no insurance at all and little capacity to pay their bills.

No discussion of the financial impacts on the current delivery system can be complete without a review of the impact of the number of Americans who are uninsured for health care benefits. The rise of uninsured patients places a very large load on the system, as providers must negotiate rates for insured patients that cover their costs plus some of the costs of the uninsured. The federal government has created some programs to assist some hospitals to offset their costs for uninsured patients, and a part of the requirement for nonprofit health care entities is that they provide a certain amount of charity care/uncompensated care in return for their tax-exempt status. The rise in the number of uninsured patients who may not qualify for Medicaid or other government assistance challenges all providers in the system, since other forms of reimbursement are not keeping up with the increase in uncompensated costs. Private insurers and employers that offer health care insurance are also balking at the increased premiums being requested by providers who are trying to limit their losses. This is one of the aspects of health care that the health care reform legislation has tried to address by requiring Americans to have insurance or pay a fine. It remains to be seen whether this will actually work or not.

Providers

There are basically two main groups of providers in the system: hospitals/clinics and physicians/other providers. Hospitals are revenue generators in the current model, due to the focus on payment for procedures, instead of being cost centers, which would be true under capitation. Given the large variety of payment approaches, hospitals are not always very focused on managing the utilization of care, although this is done more and more for hospitals with a high proportion of Medicare/Medicaid patients in their mix. These entities also focus almost exclusively on the episode of care, which begins when the patient enters the hospital and ends when the patient leaves. There is presently little focus on what happens before admission, although there is some burgeoning interest in better medical management to keep patients healthier and out of the hospital whenever possible. Hospital costs are also increased by the increasing regulatory focus leveled on them. The number of coders, verifiers, and auditors of bills, charges, and charts are growing as fast as and faster than many direct caregiver roles. Hospitals are also beginning to shift care to an outpatient basis where they can in order to reduce costs. The best way to describe the role of hospitals in the current system is to imagine it as a complex dance in which the steps constantly change, the music can alter at a moment's notice, and no one knows where the dance is actually going or what it is supposed to look like.

The other group of providers is the professionals, such as physicians, surgeons, midlevel providers (physician assistants and nurse practitioners), and other providers of care. Physicians relate that they are having to work harder and longer for less money. They feel controlled by insurance companies that demand oversight of their care and preauthorization for many services, and they have to increase their costs to manage the complexities of getting paid, including meeting insurance documentation requirements, preauthorizations for care, verifications that care is appropriate and meets criteria, and actually collecting their bills. Historically, physicians have been able to select the care and procedures that they felt patients needed and provide them without any necessity to justify the choices. However, as the financial reimbursement methodologies changed, so did the autonomy of physicians in terms of the care that could be provided without outside scrutiny. This has been a major dissatisfier, particularly for older physicians who still remember the previous system. Younger physicians who are just coming into practice have largely just learned to accept and work within the new reality. In addition, physicians struggle with arbitrary reductions in reimbursement, particularly from Medicare and Medicaid. Some physicians will no longer provide care to patients insured by these government entities, since the reimbursement is low and the documentation and verification demands are high.

Insurance Companies and Employers Who Provide Health Insurance to Employees

Insurance companies, in general, are businesses that operate to make a profit. They have shareholders to report to, and their mindset is profit-oriented, unlike many providers, such as nonprofit hospitals. In the current model, insurance companies seek to insure large populations so that risk can be more evenly distributed among a large group, which should have a significant number of healthy people who will not require services. Most insurance contracts in the current system are set up to pay for procedures, and most contracts do not have a significant focus on prevention or health maintenance. This is changing as costs for providing care escalate, but it is still the predominant approach. There is little control over utilization, although many insurance companies have active utilization review staff. The big leverage that insurance companies have is the ability to deny payment based on some infraction of the contract or based on care that is not covered in the contract. Insurance companies would also like to expand their base of contracted physicians, since those physicians have agreed to accept a prenegotiated rate for specific services. At present, the only exceptions to this are physicians providing emergency care, who can bill and collect close to fee-for-service rates, and physicians who are not contracted with a particular plan but who "balance bill" the patient for the difference between their charges and the insurance payment. This tends to enrage patients, who thought that their health care insurance would cover all the costs of care, only to discover that they have to pay a noncontracted physician the balance of the bill. The amounts for balance billing can easily run into five or six figures for a complicated emergency, such as a trauma case.

Issues for insurance companies in the current system include the need to contract with more and more physicians to provide care to the large pool of insured people, the need to put tighter controls in place to manage utilization of services and remove unnecessary care, how to manage patient care so that the patient may avoid expensive hospitalizations, how to negotiate with hospitals for contracted rates when hospitals are attempting to shift some of their costs for uncompensated care into the payment to make up the difference, and worries about quality, medical errors, and the costs that attach to those. Finally, insurance companies have great worries about government mandates for particular aspects of care, without any designated funding to cover those mandates.

Businesses that offer health care insurance to their employees face many of the same challenges. It is an important benefit, and employees expect to get it. However, the costs of premiums increase every year, and businesses are seeing a significant portion of money that would otherwise be profit shifted to cover the employer portion of the premium.

Consumers of Care

While patients are the recognized primary consumers of care, the government (both state and national) has a vested interest in the way the health care system operates. For one thing, health care spending is a considerable portion of the gross national product, and the percentage spent on health care continues to rise. The public's fears of not having adequate coverage should they become ill, of not being able to pay large unexpected bills from noncontracted providers, and of losing access to insurance if they move or lose their jobs all resonate with politicians and were major driving forces in the health care reform legislation of 2010. Government regulates health care in a major way, ensuring that quality-of-care indicators are now publically reported by the Centers for Medicare and Medicaid Services (CMS). The goal of this is to improve the quality of health care and reduce or eliminate errors that worsen patient conditions or result in death. CMS has begun the push for improved quality, partially driven by the Institute of Medicine's report on preventable deaths from health care errors. Government also ensures care for patients in emergency situations, with the Emergency Medical Treatment and Active Labor Act, which specifies that any emergency patient must receive an exam and medical care to stabilize their condition before any request for payment or financial authorization is done (Showalter, 2007). CMS is also instituting pay for performance by withholding payment for never-events, which are specified mistakes that, if they occur, the portion of the hospitalization that results from the error will not be paid to the provider.

Conclusion

The current design of our national health care system is clearly a complex, intertwined tangle of competing interests, heavy regulation, financial confusion and complications, lack of alignment among providers and insurers, and confused patients who simply want to get the care they need in a safe environment with no large financial surprises at the end of it. It is very difficult to measure the quality of different providers and to determine who has the best cost structure for those who must pay out of pocket. The story of the $7 aspirin and other such stories continue to drive concerns about a system that is heavily weighted toward complications and complexity and is very difficult to navigate easily for any of the participants. As this course continues, ways that the current system can be improved, both on the micro and macro levels, and the changes that are already in play that will destabilize the current system, will be discussed. The question is: Will they make the new system better?

References

Showalter, J. S. (2007). The law of healthcare administration (5th ed.). Chicago: Health Administration Press.

 

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