Economic and Financial Considerations in Health Policy. Gerard F. Anderson, PhD Johns Hopkins University

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2 Economic and Financial Considerations in Health Policy Gerard F. Anderson, PhD Johns Hopkins University

3 Section A Introduction to Economics

4 Four Fundamental Tenets of Economics Resources are scarce relative to human wants Resources have alternative uses People have different priorities Consumer knows best 4

5 Opportunity Costs You have to choose because you cannot do everything at once You select the best alternative given budget constraints You must make tradeoffs 5

6 Tradeoffs Guns Butter 6

7 Two Ideas Not Embraced by Economists Because They Ignore Tradeoffs Romantic We can afford it Technical Best possible 7

8 Economists Versus Clinicians Orientation of clinicians/public health advocates is to achieve... Highest quality of care possible Health services available to meet demand 100% immunization rates No pollution No medical errors 8

9 Economists Versus Clinicians Orientation of economist Social optimum Value of additional increment of health = cost of resources to provide it 9

10 Diminishing Returns Output Input 10

11 Marginal Benefit = Marginal Cost What is the benefit someone receives from the last dollar invested in health? Could the same dollar be better spent on something else and the person would receive more benefit? 11

12 Demand Term used in economics Measures what people are willing to pay for 12

13 Demand Curve P Q 13

14 RAND Health Insurance Overall Results Coinsurance Probability of Medical Use Expenses per Person Free 87% $1,019 25% 79% $826 50% 74% $764 95% 68% $700 14

15 Some of the Factors that Influence Demand for Health Care Illness level Age and gender Beliefs about medical care Advice from providers Income Education Regulations Insurance coverage Quality Access 15

16 Section B Tradeoffs as Viewed by Economists

17 Better Health or Other Goals? One in five Americans smokes People working in coal mines understand the danger Have few other options besides working in the mines 17

18 Prevention or Medical Care Cancer prevention vs. cancer treatment 18

19 Which Medical Care Provider Is Most Effective? What is the best (most cost effective) way to produce health? Physician or nurse practitioner Nurse practitioner or social worker Social worker or community health worker Community health worker or nurse s aide 19

20 Equity/Disparities How does income/race impact access to care/health status? What are the most effective ways to reduce disparities and promote equity? 20

21 Today or Tomorrow Investment in improved health status vs. consumption of medical resources Dollars spent today versus dollars spent tomorrow Dollars saved today versus dollars spent today 21

22 Discount Rate Lives saved today vs. lives saved next year Important for prevention 22

23 Identifiable vs. Statistical Lives Known person vs. statistical person 23

24 Spending Tradeoffs and Health Policy Federal government State government Corporations Unions 24

25 Medicare and Medicaid as Percentages of the Projected Federal Budget, 2004 Notes Available 25

26 Maryland State Budget: Fiscal Year 2004 Notes Available 26

27 Corporations The concern is competition in international markets Approximately $2,000 of the price of U.S. automobiles is for health benefits to American workers Approximately $1,000 of the price of European or Japanese automobiles is for health benefits to workers 27

28 Unions Corporations negotiate with unions over total compensation package Total compensation = wages + benefits If health benefits increase faster than total compensation than less money is available for wages Many employees do not acknowledge this tradeoff Bitter union negotiations over the last few years have focused on benefits 28

29 Cost Cost Effective Benefit Cost Effective Cost Benefit 29

30 How Do You Measure Cost? Direct costs Indirect costs 30

31 Costs from Whose Perspective? Person Insurer Clinician/provider Society 31

32 An Individual Person Goes to an MD What Are the Direct Costs? Person out of pocket Insurer benefits paid Clinician cost of providing treatment (payment) Society resources used 32

33 An Individual Person Goes to an MD What Are the Indirect Costs? Person time and travel Insurer administrative costs Clinician/provider none Society time, travel, and administrative 33

34 Section C Cost-Effectiveness Analysis

35 When You Calculate Costs... From whose perspective should the calculation be done? What costs should be considered? 35

36 How Do You Measure Effectiveness? Clinically Quality of life Functional level Quality adjusted life years Disability adjusted life years 36

37 How Do You Measure Benefit? In dollar terms What is a life worth? What is an eye worth? 37

38 Cost Benefit Both in dollar terms Benefits in dollar terms value of a life 38

39 Cost Effective Cost in dollar terms Effectiveness measured in some type of output (e.g., life saved) 39

40 Section D The Eightfold Path, Part I

41 1. Define the Problem Financing and Delivery System The current health care system uses an acute-care financing and delivery system to treat chronic conditions; therefore people with chronic conditions suffer 41

42 1. Define the Problem Health Insurance Health insurance is oriented to covering acute not chronic conditions; therefore people with chronic conditions suffer 42

43 1. Define the Problem Medicare Orientation The Medicare program is oriented to covering acute, not chronic, conditions; therefore Medicare beneficiaries suffer 43

44 2. Assemble Some Evidence What are the problems? 44

45 Changing Needs Infectious diseases Episodic care Chronic care 45

46 Growing Prevalence of Chronic Conditions 141,000, ,000, Data Source: Wu, Shin-Yi, and Green, Anthony. Projection of Chronic Illness Prevalence and Cost Inflation. RAND Corporation, October

47 Medical Care Spending Sixty percent of medical care spending is by people with multiple chronic conditions 47

48 Three-quarters of Americans Believe That Access to Care Is a Problem for People with Chronic Conditions 100% Percent of population believing this is a problem 90% 80% 70% 60% 50% 40% 30% 20% 72% 74% 79% 10% 0% Access to primary care specialist Obtaining prescription medications Access to medical specialist Data Source: random nationwide surveys conducted by Harris Interactive and Gallup for Partnership Solutions Note: three-fourths said that access to medical services is a problem; nine-tenths said that getting adequate health insurance is a problem 48

49 Insurance Coverage Eighty-one percent of all physicians reported that health insurance coverage was not sufficient to cover all the types of care patients with chronic conditions need Eighty-nine percent of people report difficulty getting adequate health insurance coverage for chronic conditions 49

50 Chronic Conditions and Health Care Confusion Percentages of people with chronic conditions who answered sometimes or often when asked how often the following happened in the past 12 months Been told about a possibly harmful drug-drug interaction 54 percent Been sent for duplicate tests or procedures 54 percent Received different diagnoses from different clinicians 52 percent Received contradictory medical information 45 percent Source: Harris Survey, 2000 Notes Available 50

51 The Number of Unique Doctors Increases with Number of Chronic Conditions Amount of services utilized Number of chronic conditions Source: Medicare SAF,

52 Disease Management Rationale Only 50 percent of practice guidelines are followed 52

53 Out-of-Pocket Spending Increases with Numbers of Chronic Conditions Out-of-pocket spending $2,000 $1,900 $1,800 $1,700 $1,600 $1,500 $1,400 $1,300 $1,200 $1,100 $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 $1,851 $1,382 $1,052 $718 $457 $ Number of chronic conditions Data Source: Medical Expenditure Survey (2000) 53

54 Medical Necessity Services may be covered but denied using medical necessity criterion Standard should be maintaining level of functioning, not improvement 54

55 Medicare Does Not Know It Is a Program for People With multiple chronic conditions 55

56 Beneficiaries with Five or More Chronic Conditions Account for Two-thirds of Medicare Spending chronic 0 conditions 1% 1 chronic condition 3% 2 chronic conditions 6% chronic 3 conditions 10% 5+ chronic conditions 68% 4 chronic conditions 12% Source: Medicare (2001) 5 percent sample 56

57 2. Assemble Some Evidence What are the problems? 57

58 Section E The Eightfold Path, Part II

59 3. Construct the Alternatives More research New demonstrations New legislation Revise regulations 59

60 4. Select Evaluation Criterion Health status of Medicare beneficiaries Aggregate Medicare spending Out-of-pocket spending by Medicare beneficiaries Satisfaction of Medicare beneficiaries 60

61 5. Project the Outcomes Research, Demonstrations Research and demonstrations Clearer understanding of problem and solutions 61

62 5. Project the Outcomes Legislation Legislation What is legislatively possible? What is most important change? How will change impact lives of Medicare beneficiaries? 62

63 5. Project the Outcomes Regulations Regulations What changes can be done using regulation? What are the most important changes? How will the regulatory changes impact the lives of Medicare beneficiaries? 63

64 6. Confront the Trade-offs What is most important and likely to succeed? 64

65 7. Decide Research Research Medicare will conduct research on chronic conditions 65

66 7. Decide Demonstrations Demonstrations Medicare will conduct demonstration to provide better care for people with chronic illness 66

67 7. Decide Legislation Legislation Large population groups will be given instruction on better care of chronic conditions 67

68 7. Decide Regulations Regulations Medicare will revise its definition of medical necessity 68

69 8. Tell Your Story Medicare is a program for people with chronic conditions but does not know it 69