The Economics And Finance Of Healthcare Discussion

The Economics And Finance Of Healthcare Discussion

The economics and finance of healthcare is a course that covers the financial aspects of the healthcare industry. It covers topics such as the financing of healthcare, the economics of healthcare, and the impact of healthcare on the economy. The course is designed to help students understand the financial implications of healthcare policy and how those policies impact the overall economy. It also helps students develop critical thinking skills regarding the economics of healthcare. Finally, the course provides a comprehensive overview of the various financial institutions in the healthcare industry. Students enroll in this course to be able to understand both the positive and negative impacts of healthcare on the economy The Economics And Finance Of Healthcare Discussion.

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Concept of Quality-Adjusted Life Years (QALY’s) in Relation to Cost-Effectiveness

The quality-adjusted life-year (QALY) measures disease burden, including the quality and quantity of life lived. It is used in economic evaluations to assess the cost-effectiveness of medical interventions (Milstead, 2019). QALYs are compared with the value of money to measure the cost-benefit ratio (CBR) for the proposed intervention. I think the concept of Quality-Adjusted Life Years is very important when it comes to cost-effectiveness analysis. This is because it allows for a more accurate assessment of the costs and benefits of different health interventions. In addition, it can help ensure that the best possible care is provided to patients. However, despite its importance, there are a few potential drawbacks to using Quality Adjusted Life Years when assessing the cost-effectiveness of health interventions. First, it can be difficult to accurately measure patients’ quality of life. Second, it can be difficult to adjust to all the different factors that may affect a patient’s quality of life, such as age, sex, and health status. Finally, it may be difficult to compare the costs and benefits of different health interventions using QALYs. Overall, however, I think Quality Adjusted Life Years are a very important tool when assessing the cost-effectiveness of health interventions.

The Financial Impact of Implementation and Sustaining the Policy Chosen

The financial impact of implementing and sustaining the health policy and politics is usually quite significant. Many countries have to spend a lot of money on healthcare, which can be a large financial burden. The findings of the study by Milstead (2019) suggest that implementing and sustaining a health policy can be difficult and take a lot of time. This can also lead to major delays in healthcare services, which can have a negative financial impact. Therefore, when implementing health policy and politics, there is a need to consider the QALYs concerning cost-effectiveness analysis. This is because, in most cases, implementing a health policy will result in increased costs and decreased healthcare quality. However, it is important to weigh these costs against the benefits of the policy in order to make a balanced decision. Additionally, if the health policy is not sustainable, it may have to be reevaluated or replaced to continue providing social benefits. This can lead to significant financial costs and disruption. Therefore, it is important to consider the financial impact of implementing and sustaining a health policy before making a decision.

In summary, QALYs are important in health policy and politics because they can help to identify the best ways to improve the quality of life for a population. In healthcare, QALYs can be used to compare the benefits of different treatments or interventions. This information can help to improve health policy and decision-making. Combining health policy and politics with concepts like QALYs can help to improve the overall quality of healthcare for all people.

Overview: The Economics & Finance of Healthcare

Chapter 10 Reading:

Milstead, J. A. (2019).  Health policy and politics: A nurse’s guide (6 th Ed.),The Economics And Finance Of Healthcare Discussion

▶ Introduction

Three important concepts that form the framework for health policy discussions are quality/safety of care, access to care, and cost of care. All health policy discussions boil down to one of these categories or to the synergies among these categories. This chapter focuses on the “cost” category, including some economic theories supporting current health policies and some of the structures created to implement these policies.

Health economics and the finance of health care are often erroneously used as interchangeable terms. How does health finance differ from health economics? In a nutshell, economics is the science that informs the processes of finance. The two disciplines share common ground such as cost–benefit analysis and analysis of risk, but they are not synonymous. Economics is amoral—that is, it is neither a moral science nor an immoral science. The science of health economics can suggest what makes a person, a population, a region, or a nation better off, but philosophy and ethics must be debated elsewhere and are represented by political trade-offs when policy is made. Similarly, the healthcare market as viewed by economists is amoral: When confronted with finite resources, there will be losers and winners. This is a tough concept for nurses to swallow.

Economic theory is based on the principle that all resources are scarce. Politics is the process for determining how scarce resources will be used and apportioned. Policy is the end result of the political process. Health policy is one type of policy determined in the political process and is made largely at the national level but also at state and local levels of government. Health economics is a growing research field within the discipline of economics.

Economic science studies markets such as the labor market for nurses and physicians, the pharmaceutical market, and the insurance market. Together these markets form the universe that is termed the “healthcare market.” Within the healthcare market are nonprofit organizations, government organizations, shareholder-owned corporations, and other financial entities. Economics informs policy, and policy determines finance (FIGURE 10-1)The Economics And Finance Of Healthcare Discussion.

To better understand these relationships, think about the supply and demand for oranges. When significant weather events affect the orange crop, prices go up for all products made from oranges. In response to price variation, consumers choose whether they will continue to purchase orange juice or instead purchase a substitute such as apple juice.

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In health care, shortages of resources lead to increased demand, discontinuation of manufacturing or loss of a manufacturing site, lack of raw materials at reasonable prices, quality issues in manufacturing, and delays or capacity problems (e.g., labor strikes). In January 2017, nearly 200 drugs were listed as “in shortage” in the United States: Sterile injectables such as saline and atropine sulfate topped the list. Pharmaceutical manufacturers report to the Food and Drug Administration (FDA) when there are shortages, and the FDA posts this information in the form of the Current Drug Shortage Index (https://www.accessdata.fda.gov/scripts/drugshortages/default.cfm)The Economics And Finance Of Healthcare Discussion. Because pharmaceutical manufacturing is not owned and operated by the U.S. government, the government does not control choices of what and how much to produce. Can consumers choose to go without a medication, or will they simply pay the higher price charged for a medication? Consumers frequently do choose to skip medications, sometimes at great risk. This added risk to health and life makes the healthcare market very different from all other economic markets. There are few ready-to-use substitutes for health care.

▶ Economics: Opportunity Costs

There is no such thing as a free lunch: For every opportunity taken and for every option discarded, there are trade-off costs. When you purchased the 2017 Nissan Juke, you did not purchase the 2016 Kia Soul. You also did not take a vacation, buy a new wardrobe, or pay off your college debt. Not acquiring the Soul, the vacation, the new wardrobe, or eliminating your debt, are the opportunity costs of purchasing the Juke.

Opportunity costs may also be described in terms of time spent on an activity (researching the safety of the Juke) and other indirect measures or intangibles. An example of opportunity costs related to health policy is current Medicare policy: 90% of Medicare funds are used for 10% of Medicare beneficiaries. Most Medicare dollars are expended in the final events of a person’s life. Because there are finite funds available, legislative policy directing payments for an elderly person’s last weeks of life represent an opportunity cost. For example, the funds could also be used for preventive care of 30-year-olds, more school nurses, or health research. These hard choices are the core of perennial political debates at the federal, state, and local levels. The economic consequences of a policy may last for years and may be argued equally eloquently by economists who fall on both sides of an issue.

The most important contribution economists can make to the operation of the health care system is to be relentless in pointing out that every choice involves a trade-off—that certain difficult questions regarding who gets what, and who must give up what, are inevitable and must be faced even when politicians, the public, and patients would rather avoid them. (Getzen, 2010, p. 429)The Economics And Finance Of Healthcare Discussion

▶ Finance: Does More Spending Buy Us Better Health?

 

Studies continue to show that there is no correlation between increased spending on health care in the United States and reductions in population mortality (Hussey, Wertheimer, & Mehrota, 2013)The Economics And Finance Of Healthcare Discussion. Paradoxically, achieving increased quality may require increased spending, whereas lowering costs may require higher quality or efficiency to avoid rework. In the 1900s, spending on infrastructure that provided clean water and hygiene, vaccination programs, and better access to health care resulted in large improvements in quality of life and life expectancy. As the United States approached $5,000 annual per capita spending on health care, gains in population health and life expectancy slowed. In 2016, U.S. spending reached $9,451 per capita (Organisation for Economic Co-operation and Development, 2017), but the marginal gains to health were almost imperceptible. (FIGURE 10-2 illustrates U.S. spending compared to other developed countries.) Routinely used indicators of health status—for example, infant mortality, prevalence of chronic diseases, Health Adjusted Life Expectancy, and feeling that one has good health—also do not correlate with per capita spending on health care.

FIGURE 10-2 Life expectancy in relation to per capita spending on health care.

Data from Central Intelligence Agency. (n.d.). The world factbook. Retrieved from https://www.cia.gov/library/publications/the-world-factbook/; Organisation for Economic Co-operation and Development. (2017)The Economics And Finance Of Healthcare Discussion. OECD Health Statistics 2016. Retrieved from http://www.oecd.org/els/health-systems/health-data.htm

Health care is not a true “normal good” in economic parlance. The market for a normal good or service experiences an increase in demand when income increases. There is a correlation between seeking healthcare goods and services when income rises; however, the necessity for health care even when income is extremely low makes it a special case in economics. In the absence of a national ideology and commitment that health care is a right for all people, a highly regulated market determines the haves and have nots for health care in the United States.

▶ Economics: Health Insurance Market

 

Health insurance in the United States is a misnomer: What we are actually purchasing is sickness insurance. Like other forms of insurance, health insurance is a form of collectivism in which people pool their risks—in this case, the risk of incurring medical expenses. Risk pooling is key to how insurance markets work: Each participant with marginal or poor health and a high risk of accruing high expenses is financially “balanced” by several participants with good health and low risk of high expenses. Barring the participation of individuals who already have disease or injury (preexisting conditions) allows insurers to manage adverse selection (explained in a later section)The Economics And Finance Of Healthcare Discussion. The health insurance mandate in the Affordable Care Act (ACA) provided for the enlargement and balance of the risk pool. Without the option to refuse to cover preexisting conditions or the increased risk pool created by the ACA’s mandate, the business model for the insurance market would collapse: in 2017, many insurers pulled out of the Health Insurance Exchanges because of uncertainty about the continuation of the mandate. To repeal mandated individual health insurance from the ACA and maintain the very popular feature that no one can be denied health insurance because of a preexisting condition, Congress must grapple with how insurers will balance risk pools so as to remain solvent.

As this book went to press, Congress and the Trump administration were engaging in debate over how to “repeal, replace, repair, or starve” healthcare finance in the United States. In general, liberal thinkers wish to maintain the ACA with possible improvements. Hard-right conservatives have made election campaign promises to repeal and replace the ACA, while more moderate conservatives are more open to repairing what they see as flaws in the law. Changing the manner in which all Americans obtain health insurance is extremely complex; any changes enacted by legislators will take years to implement. The American public is strongly divided about how to finance health care in the country (FIGURE 10-3).

FIGURE 10-3 U.S. public divided on repeal and replacement of the ACA.

Reproduced from Kaiser Family Foundation. (2017c). U.S. public opinion on health care reform, 2017. Retrieved from http://kff.org/slideshow/us-public-opinion-on-health-care-reform-2017/

The market for health insurance is divided into public and private insurance. The six major government healthcare programs are Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), the Department of Defense TriCare and TriCare for Life programs, the Veterans Health Administration program, and the Indian Health Service program. The insurance industry is organized into group and nongroup (or individual) insurance. For example, employer-sponsored health insurance (ESHI) is a form of group insurance. In 2016, more than 15 million Americans purchased individual insurance; by comparison, more than half the U.S. population younger than age 65 had health insurance through their jobs or a family member’s job. The National Conference of State Legislatures (2017) reports that the average health insurance premium was $18,142 per family in 2016. The cost of insurance premiums does not include out-of-pocket payments for deductibles, copays, non-covered treatments/medications, or other fees.

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One of the primary factors influencing how much you pay for health insurance is the state in which you live. Each state has a department of insurance regulating the industry within its borders. Under the ACA, all 50 states offer either the HealthCare.gov marketplace platform or a state-based marketplace (these marketplaces are also known as health insurance exchanges) designed to help individuals purchase affordable health insurance. The number of participating insurance companies, as well as variable policies and prices, are driven by market forces in each state (Assistant Secretary of Planning and Evaluation, 2016).

Some providers and organizations refuse to accept health insurance; they accept only cash-based financing. This practice, known as direct pay, arguably reduces the cost of health care by eliminating the profits insurers make and eliminating time and resources for practices to work with various insurers; allows patients to choose whomever they want as a provider; reduces gaps in consumer knowledge about prices or costs; and allows providers to lower prices to reflect the savings of having a smaller billing function (TABLE 10-1)The Economics And Finance Of Healthcare Discussion.

▶ Finance: Health Insurance Exchanges

Introduced in October 2013, health insurance exchanges (HIXs) are intended to create a more organized and competitive market for health insurance by offering a choice of plans, establishing common rules regarding the offering and pricing of insurance, and providing information to help consumers better understand the options available to them. Depending on the state, the HIX serving that state will be implemented by the state government, by the federal government, or jointly by both the state and the federal government. A HIX marketplace is where people (individuals or small businesses) not covered through their employers or by public insurance may shop for health insurance at competitive rates. Private plans, outside of the HIXs, continue to be available; however, private plans are now more likely to be available for purchase only in designated “open enrollment” periods that coincide with those of the HIXs’ open enrollment periods.

Insurance plans in the HIX marketplace are primarily separated into four health plan categories—Bronze, Silver, Gold, or Platinum—based on the percentage the plan pays of the average overall cost of providing essential health benefits to members. The plan category a person chooses affects the total amount that individual will spend for essential health benefits during the year. The percentages the plans will spend, on average, are 60% (Bronze), 70% (Silver)The Economics And Finance Of Healthcare Discussion, 80% (Gold), and 90% (Platinum). For example, Bronze plans tend to have the lowest premiums, and they provide an average cost-sharing value of 60%. In other words, a Bronze plan covers an average of 60% of all plan enrollees’ covered out-of-pocket costs. This does not mean that 60% of actual costs will be covered for any one given person; it is not the same as coinsurance, in which a person pays a specific percentage of the cost of a specific service. These “metal” categories as well as the essential health benefits required by the ACA are the subjects of scrutiny and debate in Congress.

The ACA requires the following essential health benefits to be included in every qualified health insurance plan (QHP):

Well-baby and well-child care for children younger than age 21

Oral health and vision services for children

Preventive services and immunizations

Ambulatory patient services, including laboratory services

Chronic disease management

Mental health and substance abuse coverage at parity with physical ailment coverage

Hospital/emergency services

Rehabilitation and habilitative services and devices

Prescription drug coverage

Maternity care

No cost sharing for these services

Additionally, insurers cannot impose annual or lifetime limits on health coverage, and they must offer parents the choice of covering their children up to their 26th birthday through the parent’s health insurance coverage. This requirement also applies to those persons who “age out” of the foster care system and were covered by Medicaid.

Federal subsidies are available to help individuals pay for a qualified health plan. There are two kinds of subsidies: advance premium tax credits and cost sharing. Advance premium tax credits help to pay health insurance premiums each month for people with incomes 100–400% of the federal poverty level (FPL)The Economics And Finance Of Healthcare Discussion. Cost sharing helps pay for all other health costs, such as copayments, deductibles, and coinsurance, for families with incomes 100–250% of the FPL who are enrolling in a Silver-level plan in the marketplace. Both kinds of subsidies are determined based on a sliding scale (means tested). The subsidy is determined during the initial application based on the individual/family’s annual projected income. There is no penalty for good-faith estimates that are lower than the actual income at year’s end.

The ACA requires citizens and legal immigrants to pay a penalty if they do not have a qualified health plan. The mandate for a qualified health plan can be met if an individual has public health insurance coverage, employer-sponsored health insurance, or an individual health plan purchased from either the HIX marketplace or the private insurance market. The penalties for having no health insurance may be amended by the U.S. Department of Health and Human Services or Congress.

The small business health insurance options program (SHOP) opened to employers with 50 or fewer full-time equivalent (FTE) employees in 2014. (Note: 50 FTEs is not the same as 50 employees.) In 2016, all SHOPs opened to employers with up to 100 FTEs. If a business wants to use SHOP, it must offer coverage to all of its full-time employees (generally those working 30 or more hours per week on average) and at least 70% of full-time employees must enroll in the business/SHOP plan (as opposed to being covered by a spouse’s insurance or as an individual on the HIX)The Economics And Finance Of Healthcare Discussion. More information on SHOP can be obtained from the Center for Consumer Information and Insurance Oversight.

Penalties for Not Having a Qualified Health Plan

 

In 2017, the penalty/responsibility for not having a QHP—that is, the “individual shared responsibility payment”—was $695 per adult and $347 per child younger than 18. The maximum penalty was $2,085 or 2.5% of household taxable income (whichever is greater).

Any penalties are paid when income tax forms are filed with the Internal Revenue Service (IRS) the following year. If a person obtains insurance outside of the marketplace, he or she must report that insurance coverage to the IRS every year when filing the tax return. The insurer and the employer (if applicable) provide the necessary proof of coverage to include in the tax return. There are no liens, levies, or criminal penalties for failing to pay the fee. Penalties beyond 2017 had not been announced when this text was being written The Economics And Finance Of Healthcare Discussion.

Exemptions From Penalties

In general, exemptions are income related, hardship related, group-membership related, and health-coverage related:

Those who have to pay more than 8% of their income for the lowest-cost premium

People who do not pay taxes because their income is too low

People with certain religious exemptions

Prisoners, while incarcerated

Those experiencing a hardship (e.g., victims of domestic violence, persons being evicted from their place of residence)

Native Americans and Alaskan Natives

People who would have been covered had their state of residence elected to expand Medicaid

Mixed-status families (documented and undocumented immigrants within one nuclear family)

FIGURE 10-4 depicts cartoonist Kevin Kallaugher’s perspective on President Trump’s approach to Obamacare.

▶ Finance: Healthcare Entitlement Programs

Medicare and Medicaid are publicly funded social entitlement programs and are the “third rail” of healthcare politics. Anyone meeting the eligibility requirements for Medicare (Part A) or Medicaid is entitled to all the promised benefits, no matter the condition of the government’s (state or federal) finances. As an analogy, think of your personal budget: You plan for rent, transportation expenses, utilities, clothing, entertainment, gifts, and the like in your budget, and you balance these amounts against your anticipated income to assure that your income covers your expenses. Expenses for Medicare and Medicaid are projected every year, but unlike your clothing allowance, if the government runs short of revenue (e.g., fewer taxes are collected during an economic downturn)The Economics And Finance Of Healthcare Discussion, there is no legal option to cut back on entitlement programs. Likewise, if expenses for Medicare and Medicaid are higher than projected (e.g., perhaps more seniors are seriously ill), the government cannot choose not to provide payment for the overage in services. If the government fails to meet its obligation, beneficiaries are entitled to sue.

By law, state governments must balance their budgets; the federal government may run deficits up to a ceiling set by Congress. This important concept explains many of the policies at the state and federal levels. In simple terms, Medicare is a federally funded program, and Medicaid is funded by federal and state funds along with some local funds. The full reality is more complex, but these generalities suffice for our discussion. Funding for Medicare comes primarily from general revenues (40%) and payroll taxes (38%), followed by premiums paid by beneficiaries (12%).

In 2015, the Kaiser Family Foundation reported that Medicare provided insurance coverage to 55.5 million people, including those age 65 and older (if they or their spouse made payroll tax contributions for 10 or more years) and younger people with permanent disabilities (after 24 months of receiving Social Security Disability Insurance payments), end-stage renal disease, and amyotrophic lateral sclerosis (Lou Gehrig’s disease). Medicare covers most healthcare services but does not cover long-term care services such as nursing home care (Kaiser Family Foundation, 2017b)The Economics And Finance Of Healthcare Discussion.

Medicare Part A (hospital insurance program) helps pay for inpatient hospitalizations, skilled nursing home care (up to 100 days), home health (limited post-hospital care), and hospice care. The beneficiary must pay a deductible.

Medicare Part B (supplementary medical insurance) is voluntary and covers 95% of all Part A beneficiaries. Part B helps pay for physician visits, outpatient hospital services, preventive services, mental health services, durable medical equipment, and home health. Beneficiaries pay a monthly premium plus some copayments.

Medicare Part C is also called Medicare Advantage. It includes private health plans that receive payments from Medicare to provide Medicare-covered benefits to enrollees. Plans provide benefits covered under Parts A and B and often Part D.

Medicare Part D is a voluntary program that helps pay for outpatient prescription drugs and is administered exclusively through private plans. Premiums and cost sharing vary according to the plan purchased. The Affordable Care Act improves coverage by gradually closing the “doughnut hole”—an unusual gap in coverage in which 100% of costs become out-of-pocket expenses. The cost of Part D is increasing at a faster rate than costs for the rest of Medicare.

Prior to the implementation of the Affordable Care Act, Medicare served all eligible beneficiaries without regard to income or medical history. As health reform rolled out, means testing was applied to those with very high incomes. In 2017, Medicare beneficiaries with incomes greater than $85,000 for individuals and $170,000 for couples paid premiums ranging from $170.50 to $389.80 per month, depending on the level of income, compared with the standard premium of $121.80. Extra Part D premiums range from $12.70 to $72.90 per month. Beginning in 2018, beneficiaries with incomes greater than $133,500 pay a higher premium subsidy than the current amount due to a provision in the Medicare Access and CHIP Reauthorization Act (MACRA) of 2015. Increasing means testing reaches far down into the middle class. The income thresholds for income-related premiums are frozen under current law until 2019, when it is estimated that the number of Medicare beneficiaries subjected to higher premiums will increase from 5% to 10% of Part B enrollees. Some members of Congress and administration officials have proposed increasing means testing until 25% of beneficiaries are subject to higher premiums. The Economics And Finance Of Healthcare Discussion

Note: Maryland has a 36-year-old waiver from the federal government to operationalize Medicare in a unique manner. The details are beyond the scope of this chapter; however, some economists believe that Maryland’s reimbursement system may become the model for the rest of the nation.

Medicaid was enacted under the Social Security Act in 1965 as a companion to Medicare. It entitles participating states to federal matching funds on an open-ended basis, entitles eligible individuals to a set of specific benefits, is means tested, and allows states to provide broader coverage. In addition to providing health insurance coverage, Medicaid provides assistance to low-income Medicare beneficiaries (dual-eligible), long-term care assistance (nursing home and in-home community-based services)The Economics And Finance Of Healthcare Discussion, and support for the safety-net system of health care. The largest source of federal funding to the states, Medicaid is the largest health insurance program in the United States.

Medicaid fills large gaps in the U.S. health insurance market, finances the lion’s share of long-term care, and provides core support for the health centers and safety-net hospitals that serve the nation’s uninsured population and millions of others. Within broad federal guidelines, states design their own Medicaid programs. Medicaid reimburses private providers to provide services to beneficiaries. In 2017, 20% of the U.S. population received health insurance from Medicaid. Disabled and elderly adults make up only 25% of enrollees, but they account for approximately 70% of Medicaid expenditures. Of the 12 million Americans in long-term care, 87% are covered by Medicaid, making Medicaid the major program paying for long-term care (Kaiser Family Foundation, 2017a).

FIGURE 10-5 National health expenditures in the United States by source of payment, 2015.

Data from Centers for Medicare & Medicaid Services. (2016). National health expenditure data. Retrieved from https://www.cms.gov/research-statistics-data-and-systems/statistics-trends-and-reports/nationalhealthexpenddata/nationalhealthaccountshistorical.html The Economics And Finance Of Healthcare Discussion

In those 18 states that opted out of the ACA Medicaid expansion plan, Medicaid coverage requires that beneficiaries have low incomes (defined by each state using the federal poverty guidelines) and meet one of these categories of need:

Pregnant or recent postpartum

Younger than age 18 years

Older than age 65 years and blind or disabled

These restrictions were in place across all Medicaid programs prior to the implementation of the ACA.

Medically needy persons whose incomes are too high to be eligible for Medicaid may also be covered. (Each state determines eligibility.) In addition, states may define optional eligibility groups. In 2014, the federal poverty level for a family of four was $23,850 in the continental United States and a little higher in Alaska and Hawaii (U.S. Department of Health and Human Services, 2014). As of April 2017, 32 states had expanded Medicaid by eliminating medical need categories and providing coverage to those with incomes at or below 138% of the FPL.

One of the arguments against expanding Medicaid is a fear of increasing the overall health expenditures for the United States (Rosenbaum, Rothenburg, Gunsalus, & Schmucker, 2017)The Economics And Finance Of Healthcare Discussion. FIGURE 10-5 indicates the percentage paid by each type of payer in the U.S. healthcare system.

▶ Finance: Payment Models

The long-term goal of the federal government is to move providers (physicians, advanced practice registered nurses [APRNs], hospitals, all other health professionals who are reimbursed by federal programs) from a payment system rewarding volume of care to a model based on the quality of management of the health of populations. The term population management can translate into examples such as a ZIP code as defining a population, or a population of patients with diabetes being treated within a specific practice, or the population of patients undergoing hip replacement in a hospital. Since 2016, selected hospitals and providers have acted as “laboratories” to demonstrate the efficacy of various organizational formats and payment models to advance the goal of stabilizing and lowering healthcare costs while maintaining or increasing quality and safety.

Medicare Access and CHIP Reauthorization (MACRA) of 2015 is a complex federal law that ended the prior physician and APRN reimbursement model known as the sustainable growth rate (SGR). Payment for quality of outcomes is at the heart of the changes instituted by MACRA, which took effect in 2017: Providers must choose one program for reimbursement from Medicare. The options under the Quality Payment Program consist of the Alternative Payment Models (APMs) and the Merit-Based Incentive Payment System (MIPS). Principles of the Alternative Payment Models are: The Economics And Finance Of Healthcare Discussion

Changing providers’ financial incentives is not sufficient to achieve person-centered care, so it will be essential to empower patients to be partners in healthcare transformation.

The goal for payment reform is to shift U.S. healthcare spending significantly toward population-based (and more person-focused) payments.

Value-based incentives ideally should reach the providers who deliver care.

Payment models that do not take quality into account are not considered APMs in the APM framework and do not count as progress toward payment reform.

Value-based incentives should be intense enough to motivate providers to invest in and adopt new approaches to care delivery.

APMs are classified according to the dominant form of payment when more than one type of payment is used.

Centers of excellence, accountable care organizations, and patient-centered medical homes are examples, rather than categories, in the APM framework because they are delivery systems that can be applied to and supported by a variety of payment models.

Types of payment models include fee-for-service, bundled care, accountable care, shared decision making, and the direct decision support model. Physician and APRN providers must choose whether to participate in APMs or in the MIPS. Both the APM and MIPS programs are beyond the scope of this chapter. FIGURE 10-6 depicts the overall trajectory of the payment framework models The Economics And Finance Of Healthcare Discussion.

▶ Economics: Information Asymmetry

Information asymmetry is the term used by economists to point out that healthcare consumption differs from purchasing other goods and services because of the inability of patients, providers, or payers to possess all the information needed for completely informed decision making. Optimal rational decision making requires “perfect information”—that is, the situation in which consumers are just as knowledgeable as sellers.

FIGURE 10-6 Centers for Medicare and Medicaid Services’ payment framework trajectory.

As an example, imagine you want to buy a car. You gather all the information that you can to eliminate any advantage the car seller may have in terms of the worth of this particular car. Being newly informed, you may choose to go to several dealerships before you find a seller that meets your expectations (or utility)The Economics And Finance Of Healthcare Discussion.

Now think about the typical healthcare experience. You go to your primary care provider (PCP) for your annual physical examination, and the PCP finds an abnormality and refers you to a specialist. Depending on your level of information, you will blindly trust the specialist or you may “shop around.” You may be very hard-pressed to learn about the quality or performance of either your primary care provider or the specialist. If you are referred to a hospital, you are probably unable to learn the nurse-to-patient ratio even though evidence shows that this factor is critical to your well-being. Clearly, information asymmetry is present at many points in this scenario.

Healthcare professionals might argue that they generally know what is “best” for patients. The problem of asymmetric information differs from a simple information problem in that one party possesses knowledge needed to enable rational decision making that the other party lacks. However, the healthcare professional and the insurer have a potential conflict of interest because of the exchange of money. The potential for benefiting monetarily from a decision may affect the decision-making process. In health care, the patient delegates much decision making to the healthcare professional (and sometimes even to the insurer)The Economics And Finance Of Healthcare Discussion.

Asymmetric information also affects healthcare professionals when patients conceal lifestyle information or state that they are in compliance with a treatment when they are not. In addition, a patient’s caregiver may withhold or distort information that would be helpful to the provider. Insurers face information asymmetry as well: Clients (consumers who are the buyers of insurance) know much more about the state of their health and their future plans than an insurer knows.

Two specific types of information asymmetry are adverse selection and moral hazard.

Economics: Adverse Selection and Moral Hazard

Economists use the terms adverse selection and moral hazard to describe the situations insurers face when consumers have greater information about their health than insurers or payers. Adverse selection occurs when a person participates in a health plan based solely on the likelihood that he or she will have higher than usual health expenses (e.g., planning to get pregnant). Moral hazard occurs when a health plan member uses more health services than that person ordinarily would simply because he or she is insured (e.g., a person with orthodontic coverage gets braces on his teeth for cosmetic purposes only)The Economics And Finance Of Healthcare Discussion. Insurers and payers may also lack sufficient information regarding the choices and decisions of providers and may be unable to ascertain if a procedure is truly medically necessary.

The patient, who does not pay the bill, demands as much care as possible. In contrast:

[T]he insurance company maximizes profits by paying for as little as possible; . . . it is very costly for either the patient or the insurance company to prove the “right” course of treatment. In short, information asymmetry makes health care different from the rest of the economy. (Wheelan, 2002, p. 86)

Imagine that you have consciously chosen not to purchase health insurance because you are young and enjoy good health; you decide it is cheaper to pay the annual penalty. Recall that insurers may no longer deny health insurance to those who have preexisting health conditions. Within a few months, you unexpectedly become pregnant and decide that you do not want to pay the full cost of prenatal care, delivery, and postpartum care, so you seek a private insurer such as Blue Cross and Blue Shield (BCBS) to purchase insurance. After the baby is born, and BCBS has paid for the costs of your pregnancy and delivery, you decide that you no longer need insurance and drop your coverage. This is an example of adverse selection. The Economics And Finance Of Healthcare Discussion

If millions of people made this kind of choice, it would have dire effects on the insurance market. Insurance markets rely upon having a mix of customers who will not require payouts for healthcare episodes and customers who will. In other words, in the health insurance market, the healthy subsidize the sick. If only the old, the sick, or the disabled purchased health insurance, the market would collapse under the weight of their expenses. The scenario in health insurance is similar to that for other types of insurance, such as fire, life, and automobile—those customers who do not use the benefits subsidize those who do. Mandating the purchase of health insurance is an economic strategy designed to create a sustainable risk pool of beneficiaries.

▶ Finance: Comparative Effectiveness Research and Quality-Adjusted Life-Years

 

Imagine a system of research in which new discoveries or approaches to reduce or eliminate disease are tested for effectiveness against doing nothing at all. The current gold standard for research in the United States is the randomized control trial (RCT), in which a group of subjects receives a treatment while another group receives no treatment. Effectiveness is decided by whether the disease or condition responded to the new approach, but the new approach is not compared to any other approach.

As a result of the 2009 American Recovery and Reinvestment Act (ARRA) and the 2010 ACA, the federal government made major investments in comparative effectiveness research (CER). CER compares the overall benefits of one therapeutic approach with those of another for the majority of patients. These investments are yielding new information about which treatments work best for which population of patients. But how will this research be used beyond informing provider decisions?The Economics And Finance Of Healthcare Discussion

Here is an example of a current dilemma: Solvadi is a new drug developed to treat hepatitis C, a life-threatening disease that often goes unrecognized until it reaches its final stages. Solvadi costs $1,000 per dose, and a full treatment regimen costs $84,000. In March 2014, the high price of this medication led to street protests in San Francisco. Health experts say that treating every person with advanced liver disease (from hepatitis C) in California would cost $6.3 billion if Solvadi was given to all those patients. With a success rate of about 90%, Solvadi is an improvement over older drugs, for which regimens cost only $25,000.

Should public insurance pay for Solvadi? Does a regimen of Solvadi have cost benefits when compared to a liver transplant and lifelong immunotherapy? Is avoiding chronic disease “worth” the cost? How many productive years of life are gained? If California’s Medicaid program typically spends $3,500/beneficiary/year, how many new beneficiaries could be covered for the $6.3 billion? Economists and health services researchers tackle these types of questions by conducting CER and using a concept called quality-adjusted life-years (QALYs)The Economics And Finance Of Healthcare Discussion.

QALY is an economic concept developed in the 1960s to facilitate cost-effectiveness analysis. Economists have attempted to include personal preferences regarding age and health conditions and have created a catalog known as the EQ-5D Index. For instance, if you have colon cancer and you are a 65-year-old white female, your EQ-5D index for QALYs is 0.93. That is, if you live 1 year with colon cancer, it is only worth 93% of a year with full health and no diseases. If you have two conditions at the same time (e.g., colon cancer and neurotic disorder), your EQ-5D index is 0.79. Once economists know how many QALYs a treatment is worth, they can figure out its cost per QALY—the broadest measure of the cost-effectiveness of health care.

In general, a QALY carries an economic value of between $70,000 and $150,000 per quality life-year gained by applying a treatment or approach (Anderson et al., 2014). Will CER be used to determine not only a treatment’s effectiveness but also the cost-effectiveness and ultimately payment decisions? CER findings can be translated into practice in a variety of ways, some of which may be more acceptable to the public than others. QALYs have been linked to CER in the United Kingdom by the National Institute for Clinical Excellence and have led to debates about rationing care. This “R” word represents a slippery slope for opponents of government funding for CER.

The Patient-Centered Outcomes Research Institute (PCORI) was created under the ACA to coordinate government activity around CER. The ACA does not include cost-effectiveness determinations among the guidelines for PCORI. PCORI conducts research to provide information about the best available evidence to help patients and their healthcare providers make more informed decisions. PCORI’s research is intended to give patients a better understanding of the prevention, treatment, and care options available and the science that supports those options. The Economics And Finance Of Healthcare Discussion

▶ Finance: Bending the Healthcare Cost Curve Downward

Historically, physicians and hospitals have been paid for each procedure, test, visit, and consultation; that is, they received more pay for doing “more,” whether or not “more” resulted in good patient outcomes. This kind of practice drives up costs for health care. One of the ways the ACA seeks to reduce healthcare costs in the United States is by encouraging providers and hospitals to form networks to provide good-quality care to Medicare beneficiaries while holding costs down. In such a system, providers get paid more if they keep their patients well. One of the challenges for hospitals and providers is that the incentives seek to reduce hospital stays, emergency room visits, and use of expensive specialist and testing services—all the ways that hospitals and physicians make money in the current fee-for-service system.

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Unlike in other industries, prices for health care vary dramatically depending on who is paying and on geography. The U.S. system is a bit like shopping in a department store where there are no prices marked on the goods. You check out, and a few weeks later, you receive a bill that reads, “Pay this.” Growing movements toward price transparency in health care hope to empower patients to overcome information asymmetry, make wise choices, and foment competition that may lower prices. Physicians and hospitals that rarely competed on cost have been cushioned by third-party payers who pay the bulk of the bills. The advent of the Healthcare Blue Book (https://healthcarebluebook.com/) aims to do what the Kelley Blue Book does for used cars—namely, identify a “fair price” for specific healthcare services in the patient’s local area. Some argue that true price transparency will destabilize the healthcare industry. Others think that transparency may confuse consumers (Beck, 2014).

Overview: The Economics & Finance of Healthcare
Readings:
Milstead, J. A. (2019). Health policy and politics: A nurse’s guide (6 th Ed.), Chapter 10 [DOCUMENT ATTACHED].
PLEASE ANSWER BOTH Discussion Questions BELOW:
1. How do you feel about the concept of Quality Adjusted Life Years (QALY’s) in relation to cost effectiveness analysis?

2. What is the Financial Impact of implementation and sustaining he policy you have chosen? The Economics And Finance Of Healthcare Discussion