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Overview of Health Care Issues Challenges and Opportunities Health, Society and the Physician February 2, 2010 Physician Competency Paul B Gardent Senior Associate, Center for Leadership & Improvement The Dartmouth Institute for Health


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SLIDE 1

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Overview of Health Care Issues – Challenges and Opportunities Health, Society and the Physician February 2, 2010

Paul B Gardent Senior Associate, Center for Leadership & Improvement The Dartmouth Institute for Health Policy and Clinical Practice Adjunct Professor, Tuck School at Dartmouth

Physician Competency

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“Good Medical Practice”

  • Patient Care
  • Medical Knowledge and Skills
  • Practice-based Learning and Improvement
  • Interpersonal and Communication Skills

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  • Professional Behavior
  • Systems-based Practice

Alliance for Physician Comptence https://gmpusa.org/Docs/GoodMedicalPractice-USA-V1-0WSide.pdf ACGME Common Program Requirements http://www.acgme.org/outcome/comp/GeneralCompetenciesStandards21307.pdf

“Good Medical Practice” As doctors, we must:

  • demonstrate an understanding of how the system of

healthcare in which we work affects our performance;

  • utilize system resources effectively to provide optimal

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y y p p care;

  • understand how our patient care and other professional

activities affect other healthcare professionals, the healthcare system in which we work, and the larger society.

Draft Statement: Alliance for Physician Competence (1/10/2007)

My Thesis

  • Knowledge and understanding of the system of health

care is important to being a competent physician

  • Knowledge and understanding of the system of health

care is important to your professional satisfaction and

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care is important to your professional satisfaction and morale

Learning Objectives

  • Understand what is health and what determines health
  • Understand key challenges facing health care today,
  • Have a basic understanding of the structure and financing
  • f US health care,
  • Understand the strategic dilemmas facing hospitals and

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Understand the strategic dilemmas facing hospitals and physicians in today’s environment,

  • Examine some real-world situations and the dilemmas

they raise

  • Appreciate why knowledge and understanding of the

system of health care is important to being a competent physician

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SLIDE 2

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Presentation Outline

1: Overview of Health

  • What is health and what determines health

2: Overview of Health Care

  • Structure of Health Care Marketplace
  • Health Policy Challenges

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3: Financing Health Care

  • Payers, Reimbursement & Cost Shifting

4: A Provider’s Dilemma – A Real Example

  • Payer Mix
  • Clinical Program Mix

5: Case Discussion

First A Quiz

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Source: http://www.unnaturalcauses.org/

How does American life expectancy compare to other countries?

(Based on 2005 data reported in the 2007 United Nations Human Development)

A Number 1

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  • A. Number 1
  • B. In the top 10
  • C. 29th place

ANSWER:

  • C. 29th place

At 77.9 years, we are tied with South Korea and Denmark for 29th – 31st place, despite

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being the second wealthiest country on the planet (measured by per capita GDP). Japan has the highest life expectancy at 82.3 years Where does the U.S. rank in the percentage of the population that smokes cigarettes?

(of the 30 OECD countries)

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  • A. #1 (highest smoking rates)
  • B. Top 5
  • C. Top 10
  • D. 11-20th place
  • E. Below 25 (lowest smoking rates)

ANSWER:

  • E. Below 25

Japan has the longest life expectancy AND th hi h t t f k

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AND the highest percentage of smokers. The French smoke more and live longer. The Germans drink more and live longer.

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What is the greatest difference in life expectancy observed between counties in the U.S.?

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  • A. 7 years
  • B. 15 years
  • C. 22 years
  • D. 25 years

ANSWER:

  • B. 15 Years

Populations in some wealthy communities li ll i t th i 80 hil

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live on average well into their 80s, while

  • thers in some inner city neighborhoods

and Native American reservations barely scratch 60. Between 1980 and 2000, how did the life expectancy gap between the least well off and most well off counties in the U.S. change?

  • A. Narrowed by 12%
  • B. Remained the same
  • C. Widened by 60%

ANSWER:

  • C. Widened by 60%

As economic inequality grew after 1980, so did the life expectancy gap between so did the life expectancy gap between the rich and the rest of us. In contrast, a recent study (Krieger et al) showed that premature death and infant mortality gaps narrowed between 1966 and 1980.

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Children living in poverty are how many times more likely to have poor health, compared with children living in high- income households?

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  • A. 3 times
  • B. 4 times
  • C. 5 times
  • D. 7 times

ANSWER:

  • D. 7 Times

Children are most vulnerable.

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Not only are they susceptible to sub-standard housing, poor food, bad schools, unsafe streets and chronic stress, but the impacts of childhood poverty are cumulative and last into adulthood and can even affect the next generation.

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A Whether or not you smoke

On average, which of the following conditions is the strongest predictor of your health?

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  • A. Whether or not you smoke
  • B. What you eat
  • C. Whether or not you are wealthy
  • D. Whether or not you have health

insurance

  • E. How often you exercise

ANSWER:

  • C. Whether or not you are

wealthy

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The wealthier you are, on average, the better your health, from the bottom all the way to the top. Genes, diet, exercise and other behaviors are

  • important. But a poor smoker still stands a greater

chance of getting ill than a rich smoker.

A New drugs (like penicillin)

The most important factor behind the 30 year increase in U.S. life expectancy during the 20th century was:

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  • A. New drugs (like penicillin)
  • B. Social reforms (like wage and labor laws, housing

codes, etc.)

  • C. The development of the modern hospital system
  • D. Migration from the countryside to the cities

E. More exercise and less smoking

ANSWER:

  • B. Social Reforms

Researchers attribute much of our increase in life

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Researchers attribute much of our increase in life expectancy to social changes--better wages, housing, job security and working conditions, civil rights laws, sanitation and other protections that enlarged the middle class.

  • A. They spend more on medical care

Citizens of other industrialized countries have longer life expectancies and better health than we do because:

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y

  • B. They are more homogeneous
  • C. They are more egalitarian
  • D. They smoke less
  • E. They have universal health care

coverage

ANSWER:

  • C. They are more egalitarian

While universal health care coverage is important, its impact on health is less than the social conditions

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that make us sick in the first place. Social policies like living wage jobs, paid sick and family leave, paid vacations, universal pre-school and guaranteed health care are mandated by law in many other countries.

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What is health?

World Health Organization “Not merely the absence of disease but a state of physical, mental and social well-being”

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What determines health?

Most attention & focus Less attention but important

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Little attention may be most important

Public Health vs. Health Care

Public Health Health Care

Goals: Health of Population Health of Individuals Language: Promotion/Prevention Care (primary, secondary, tertiary) Financing: Government Government, Patients, Insurers Spending: $60 Billion 1.94 Trillion

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“Mean per capita spending for public health in 2004-2005 was $149, compared to $6,423 for overall health care”

Beitsch, Health Affairs, July/Aug 2006

“Potential Health and Economic Consequences of Misplaced Priorities

Examples of poor choices in allocation

  • f health care dollars.

Effective Services (Overuse/Underuse) - smoking cessation/breast cancer screening Delivering Care – Investment in biomedical vs delivery

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Delivering Care Investment in biomedical vs delivery improvement Preventing Disease – reduce chronic disease by reducing risk factors Fostering Social Change – reduce social disparities

Woolf, S; Potential Health and Economic Consequences of Misplaced Priorities, JAMA (2/7/07)

“Potential Health and Economic Consequences of Misplaced Priorities

Why do we have misplaced priorities and irrational allocation of resources? Competing priorities and tensions “pit two prevailing ethics against each other American individualism vs

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ethics against each other – American individualism vs the utilitarian commitment to the common good – and the resulting deadlock has, for years, mired the status quo in place.”

Woolf, S; Potential Health and Economic Consequences of Misplaced Priorities, JAMA (2/7/07)

What are the implications for you?

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Presentation Outline

1: Overview of Health

  • What is health and what determines health

2: Overview of Health Care

  • Structure of Health Care Marketplace
  • Health Policy Challenges

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3: Financing Health Care

  • Payers, Reimbursement & Cost Shifting

4: A Provider’s Dilemma – A Real Example

  • Payer Mix
  • Clinical Program Mix

5: Case Discussion

Health Care Industry

Consumer

$$$ S P

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Payer Provider Supplier

$$$ $$$ Product Service Product

Consumer/ P i Supplier

Pharmaceuticals,

$$$

Payer 1

Sources of Payment Government, Employers, Individuals

Payer 2

Intermediaries

$$$

Government

Planning, Regulation, Funding (research & ed)

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Patients Provider

Hospitals, Physicians, Nursing Homes, Surgi‐Centers, Home Health Care, Pharmacies Biotech, Medical Devices, Health IT

$$$ Products Service Product

Medicare, Medicaid, Insurance Companies

$$$

Hospitals - Organizational Types

  • Not-for-profit hospitals & HC organizations

– Legally dedicated to the collective good – Community Board of Trustees – Hold assets, including accumulated profits, in trust for the citizens of the community D f d l fi

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– Do not pay federal taxes on profits

  • For-profit hospitals & HC organizations

– Legally responsible to shareholders – Have the right to distribute profits to shareholders – Pay federal taxes on profits

  • Governmental hospitals and HC organizations

– Veterans Affairs – Uniformed Services

Hospitals

  • 5,800 Hospitals – Employ 5.1 million

– 61% NFP: 71% beds, 74% admissions, 75% expenses

  • Established for common good

– 15% FP: 13% beds, 12% admissions, 9% expenses

  • Owned by private corporations, allowed to distribute

profits

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profits – 24% Gov: 16% beds, 14% admissions, 16% expenses

  • Owned by federal, state or local governments
  • Most hospitals are small

(46% < 100 beds, 70% < 200 beds)

  • Most admissions occur in larger hospitals

(10% <100 beds, 30% <200 beds)

Other health care settings

  • Provider offices
  • Skilled Nursing Facilities
  • Home health care
  • Hospice
  • Nursing homes

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  • Nursing homes
  • Ambulatory care centers
  • Surgi-centers
  • Mobile Imaging
  • Telemedicine
  • Alternative Medicine
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36 37

Presentation Outline

1: Overview of Health

  • What is health and what determines health

2: Overview of Health Care

  • Structure of Health Care Marketplace
  • Health Policy Challenges

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3: Financing Health Care

  • Payers, Reimbursement & Cost Shifting

4: A Provider’s Dilemma – A Real Example

  • Payer Mix
  • Clinical Program Mix

5: Case Discussion

Major Trends Shaping Health Care

  • 1. Continuing pressure over financing of health

care 2.The impact of an aging population. 3.Rising activism among consumers and providers of health care

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providers of health care. 4.Rapid advances in technology. 5.Unequal distribution of health care resources among communities and citizens. 6.Recognition of the impact of non-medical determinants of health. Health Care Policy Challenge

Quality

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Cost Access Trust/Morale

Wednesday, September 16, 2009

Insurance Premiums Continue Upward Rise in 2009, New Study Finds The average family premium for employer-sponsored health insurance increased by 5% in 2009

l i f f il h lth

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The average annual premium for family health

coverage is now $13,375,

Colliver, San Francisco Chronicle, 9/16

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September 15, 2009 Washington Post

Many Employers to Raise Cost of Health Benefits, Survey Finds

A major business lobby weighed in Tuesday, saying that if current trends continue, annual health-care costs for

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employers will rise 166 percent over the next decade -- to $28,530 per employee.

"Maintaining the status quo is simply not an option," said Antonio M. Perez, chief executive of Eastman Kodak and a leader of the Business Roundtable. "These costs are unsustainable and would put millions of workers at risk,"

Cost Challenge

Paradox Conflict between overall growth in health care costs and providers perception of poor

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costs and providers perception of poor payments Cost Challenge

Comparison of International Spending on Health Care 1980 -2007

44 Source: Commonwealth Fund 2009

Cost Challenge

The escalating costs of health care is not the only financial challenge.

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Variation in costs is a significant issue for US health care Variations in Spending Across Regions

Average per capita Medicare spending, health care resource levels, and

  • ther key attributes of U.S. hospital referral regions according to

quintiles of spending.

46 Fisher ES, Wennberg D, Stukel TA, et al. The implications of regional variation in Medicare spending, Ann Intern Med. 2003

McAllen, Texas

Variations in spending for patients with severe chronic disease for US News and World Reports top 15 “Honor Roll” Academic Medical Centers

UCLA Medical Center 72,793 New York-Presbyterian 69,962 Johns Hopkins 60,653

100,000 100,000 120,000 120,000 g per g per decedent

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Johns Hopkins 60,653 UCSF Medical Center 56,859

  • Univ. of Washington

50,716

  • Mass. General

47,880 Barnes-Jewish 44,463 Duke University Hosp. 37,765 Mayo Clinic (St. Mary's) 37,271 Cleveland Clinic 35,455

20,000 20,000 40,000 40,000 60,000 60,000 80,000 80,000 Inpatient + Part B spending Inpatient + Part B spending

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SLIDE 9

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Quality/Safety Challenge

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Consumer Reports – March 2010

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Quality/Safety Challenge Patient Safety

  • According to the IOM Report entitled, “To Err is Human”,

up to 98,000 people die in hospitals as a result of medical errors which could have been prevented.

  • 6-10 percent of hospitalized patients experience adverse

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6 10 percent of hospitalized patients experience adverse drug events (ADE’s).

  • CDC estimates that about one in twenty patients gets an

infection in U.S. hospitals each year.

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  • Dartmouth Atlas, Center for Evaluative Clinical Sciences, Dartmouth College

Access Challenge

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Access To Health Care in the US

  • Over 46 million Americans were without health insurance in 2008

according to census bureau.

  • Since 2000 the number of uninsured under the age of 65 has

grown by six million.

  • Employer-sponsored health insurance has decreased by five full

t i t i 66 t f th ld l i 2000

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percentage points, covering 66 percent of the non-elderly in 2000, but just 61 percent in 2004.

  • Two-thirds of this growth in uninsured adults occurred among the

poor or near-poor.

Controversy over what the real number is.

Kaiser Family Foundation

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Uninsured - Higher

The study, commissioned by the consumer health advocacy group Families USA, found 86.7 million Americans were uninsured at one point during the past two years. Among the report's key findings:

  • Nearly three out of four uninsured Americans were without

health insurance for at least six months.

  • Almost two-thirds were uninsured for nine months or more.
  • Four out of five of the uninsured were in working families.

Source: Families USA Report , March 2009 54

Uninsured - Lower

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http://keithhennessey.com

How do we fix these problem of cost, quality and access?

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A Philosophical Divide

M k h l h R l i

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Make health care more of a free market to control costs Regulate services and prices more to control costs Need for Regulation

Health Care Not A Traditional Market System

  • Providers have substantial market power.
  • Employer’s inability to push efficiency and quality
  • The seller determines what the consumer will get; supply

drives demand.

  • Important health care services are often obtained at a time of

personal crisis.

  • Consumers have limited, if any, access to information on

price or quality.

  • Government regulation and programs alter provider behavior.

See: Nichols, et al, “Are Market Forces Strong Enough To Deliver Efficient health Care Systems”

Health Care Needs Market System

  • Government regulation and programs alter market incentives
  • Need a consumer driven system
  • Consumers clout can impact cost and quality
  • Put money in the hands of patients
  • Remove the middleman in the doctor-patient relationship
  • Consumers and physicians will be empowered to make the

system work the way it should. See: R Hertzlinger, Who Killed Health Care

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SLIDE 11

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Rapid City Hospital vs Black Hills Surgery Center

Did Dr Teuber have the right idea?

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Presentation Outline

1: Overview of Health

  • What is health and what determines health

2: Overview of Health Care

  • Structure of Health Care Marketplace
  • Health Policy Challenges

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3: Financing Health Care

  • Payers, Reimbursement & Cost Shifting

4: A Provider’s Dilemma – A Real Example

  • Payer Mix
  • Clinical Program Mix

5: Case Discussion Distribution of U.S. Health Care Expenditures by Payer Source 2003

Consumer Out of Pocket 13.7% Medicaid Other Government 12.7%

Total = $1.7 Trillion

62 Private Insurance 35.8% Other Private 4.8% Medicare 17.0% Medicaid 16.0%

Source: Centers for Medicare and Medicaid

Role of Insurance Plan

  • Package benefits
  • Underwrite Insurance Risk
  • Administer Claims

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  • Negotiate Contracts

Majority of Employer-sponsored health care is self-insured.

What is Insurance

  • A mechanism to protect against

unpredictable loss

  • Basic function is to spread the risk of

infrequent large losses over a wide base

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infrequent, large losses over a wide base Is all of health care unpredictable, infrequent & large?

Insurance Issues

  • Moral Hazard

– The prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk.

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  • Adverse Selection

– The tendency of people with poor health or expectations of health problems to apply for or continue health coverage to a greater degree than people in better health or with expectations of better health.

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Why do we have employer based health insurance in US?

  • Health insurance was started to distribute risk.
  • Initially, started by providers
  • Expansion in the 1920s and 30s

(development of BC in 1929 Baylor Hospital

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(development of BC in 1929 Baylor Hospital BS started by Cal Med Society).

  • During WWII, wage freezes were in effect.

Employers used health insurance to persuade employees to work for them. This is why employers pick up most health care insurance costs.

  • Health insurance benefits not taxable

Employers Pay The Greatest Percentage Of Insurance Costs

  • Most who work for large firms are covered

– It costs more for small firms

  • Higher risk businesses
  • Small risk pool

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Small risk pool

  • Part-time or contingent work force
  • Less potential to self-fund
  • Health insurance is a huge cost to business

– Businesses are putting on pressure to cut costs

Employer-sponsored Insurance

“Employers face a fundamental problem: they lack the clout in most markets to affect providers behavior through the devices they are currently using.” “It is likely that employer-sponsored insurance…will

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y p y p persist for some time in the US but its role will steadily diminish…accompanied by incremental increases in the role of government.”

Blumenthal, Employer-Sponsored Insurance-Riding the Health Care Tiger, NEJM, 7/13/06

Government Payors Medicare & Medicaid Medicare

  • A federal health insurance program for people aged 65 and
  • ver, for people eligible for social security disability

payments, and for individuals who need kidney transplantation or dialysis.

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Medicaid

  • A federally aided, state-operated and administered program

which provides medical benefits for certain indigent or low-income persons in need of health and medical care. 2008 HHS Poverty Guidelines Persons in Family or Household 48 Contiguous States and D.C. Alaska Hawaii 1 $10,400 $13,000 $11,960 2 14,000 17,500 16,100 3 17,600 22,000 20,240 4 21 200 26 500 24 380

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4 21,200 26,500 24,380 5 24,800 31,000 28,520 6 28,400 35,500 32,660 7 32,000 40,000 36,800 8 35,600 44,500 40,940 For each additional person, add 3,600 4,500 4,140

SOURCE: Federal Register, Vol. 7 3 , No. 1 5 , January 2 3 , 2 0 0 8 , pp. 3 9 7 1 – 3 9 7 2

Dartmouth-Hitchcock

PRIMARY DRIVERS OF INPATIENT NET REVENUE

Fee For Service Gross Charges ($) Discount Rate (%) $ V O L U M E R A T E NET REVENUE 71 Per Diem Day Payment / Day $ Per DRG Discharge

X

Payment / Discharge X

=

$ Case Weight (CMI) Capitation Covered Lives Per Member Per Month $ (PMPM) 10/01/01

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SLIDE 13

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Reimbursement Incentives Over-treatment Vs Under-treatment Tests Days Admissions Fee for Service Per Diem Per Episode (DRG) Capitation Reimbursement Incentives Over-treatment Vs Under-treatment Tests Days Admissions Fee for Service

+ + +

Per Diem

  • +

+

Per Episode

  • +

(DRG) Capitation

  • Finances: Difference Between

Charges & Payments

Cost Shifting

The allocation of unpaid costs of care

delivered to one patient population through above-cost revenue collected from other patient populations.

For hospitals, nursing facilities and

physicians, the historical cause of cost shifting has been below-cost reimbursement rates paid by public programs and uncompensated care losses due to charity care and bad debt.

Figure 1: Revenue Structure of a Health Care Provider

100% 110% 120% 130% 140% 150% 160% 170% aid Medicaid 7% If all payers pay 100% of COST, then the provider will break even. (If all pay 104% of cost, the provider will have a 4% operating margin)

Hospital Cost Shifting

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% % of Gross Charges by Payer % of Cost Pa Insurance 45% Self-Pay 7% Medicare 41% 0% 100%

Revenue Structure of a Health Care Provider

100% 110% 120% 130% 140% 150% 160% 170% Paid Revenue above 100% Shortfalls 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% % of Gross Charges by Payer % of Cost P Insurance 45% Self-Pay 7% Medicare 41% Medicaid 7% 0% 100%

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Governor Lynch details 'painful' cuts to budget Plan quickly okayed; more on the way “Gov. John Lynch yesterday unveiled $50.2 million in "painful" cuts to this year's budget, aimed at making up for expected revenue

  • shortfalls. Legislators quickly approved the plan.

The widespread cuts mean that for the next four months, the state will p , pay hospitals roughly one-third less for caring for low-income Medicaid patients, saving $7 million. An anti-cancer program will get $250,000, a fraction of its original $2 million budget, providing for hundreds fewer disease screenings. The Medicaid rate cuts were particularly difficult, because the $7 million cut in state funding means a loss of $7 million in federal matching funds, creating a $14 million hole in the Medicaid budget.”

Concord Monitor, February 23, 2008

Hospital Care 30.7% Other 19.7%

Distribution of U.S. Health Care Expenditures by Category

Total = $1.7 Trillion

81 Physician Services 22.0% Other Professional 10.3% Prescription Drugs 10.7% Nursing Home 6.6%

Source: Centers for Medicare and Medicaid

DARTMOUTH-HITCHCOCK TOTAL BUDGETED EXPENSE BY CATEGORY

OTHER 9% BAD DEBT EXPENSE 4% OCCUPANCY 4% PROFESSIONAL SALARIES + BENEFITS 62% PROFESSIONAL LIABILITY 2% DEPRECIATION & INTEREST 5% MEDICAL SUPPLIES & MEDICATIONS 14%

Presentation Outline

1: Overview of Health

  • What is health and what determines health

2: Overview of Health Care

  • Structure of Health Care Marketplace
  • Health Policy Challenges

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3: Financing Health Care

  • Payers, Reimbursement & Cost Shifting

4: A Provider’s Dilemma – A Real Example

  • Payer Mix
  • Clinical Program Mix

5: Case Discussion

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Financial Situation

  • Demand for services growing rapidly.
  • Growth in patient volume did not translate into
  • perating margin improvement. An adequate operating

margin is critical to funding new program and capital investment.

  • While managing costs has been challenging, expense

growth is not the major driver of DHMC’s difficulty in producing an adequate margin.

  • The primary challenge is on the revenue side related to

Payer Mix and Clinical Program Mix

Strategic & Financial Issues

  • In addition to volumes the most significant trends

affecting a health care organization’s financial performance are – Minimal payment rate increase – Payer mix – Clinical program mix Clinical program mix

  • The underlying financial performance of different

clinical programs has the most significant impact on financial performance.

  • Strategic decisions regarding clinical program mix is be

critical to financial health

  • We will review impact of payer mix and program mix
  • n provider finances.
  • 1. Payor Mix
  • 2. Clinical Program Mix

Dartmouth-Hitchcock

SHARE OF GROSS REVENUE and OPERATING LOSS Combined MEDICARE & MEDICAID (NH + VT)

SHARE OF GROSS REVENUE 40.9% 40.3% 41.6% 41.3% 43.1% 43.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% OPERATING GAIN (LOSS) (in Millions) 0.0% 01 02 03 04 05 06 ($33.6) ($42.0) ($53.5) ($67.1) ($77.9) ($89.1) ($100.0) ($80.0) ($60.0) ($40.0) ($20.0) $0.0 01 02 03 04 05 06

OPERATING GAIN (LOSS) (in Millions) $40.0 $60.0 $80.0 $100.0 01 02 03 04 05 06 ($60.0) ($40.0) ($20.0) $0.0 $20.0 Combined Medicaid Medicare All Other Total Operating Margin

DARTMOUTH-HITCHCOCK MEDICAL CENTER Basic Model for Revenue Impact of 6% Expense Increase (on a per unit basis) Net Revenue Charge 50% Government 0% 50% All Other 6% Overall Average 3% Expenses (Excluding new space, tails, etc.) 6% (Excluding new space, tails, etc.) 6% Shortfall (3%) 3% on $800 million = ($24 million) Under this scenario how much do you have to increase charges to private payors to cover a 6% expense increase?

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SLIDE 16

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Payor Mix Summary

  • There is great disparity in how DHMC is paid for the care it
  • provides. Payments range from:

– A high of a 74% of charges average for private pay indemnity contracts – A low of a 27% of charges average for Medicaid

  • To demonstrate the sensitivity of revenue stream to payor mix,

if all of DHMC’s services were paid: – At the indemnity average of 74% DHMC would have net revenue of $888 million – At the Medicaid average of 27% DHMC would have net revenue of $324 million

Payer Mix Summary

  • Payer mix trend was negative. Over the four years:

– The payer mix for best payer category (indemnity contracts) decreased 23% – The payer mix for worst payer category (Medicaid) has increased 24%

  • The impact of this trend was a net revenue reduction of

approximately $14 million or an amount equivalent to a 2.0% operating margin.

DHMC: Overall Impact of Payor Mix on Net Revenue FY01 to FY05 ($ in 000s)

  • Est. FY05 Margin Using

Payor Mix FY01 FY05 FY 2001 FY 2005 Change Payor Mix Payor Mix Change Medicare 38.9% 36.9%

  • 2.0%

($51,116) ($48,428) $2,688 Medicaid 8.7% 10.7% 2.1% ($23,602) ($29,166) ($5,564) Managed 20.0% 24.4% 4.4% $7,865 $9,608 $1,744 Indemnity 32.4% 28.0%

  • 4.4%

$79,761 $66,189 ($13,572) 100% 100% 0% $12,908 ($1,796) (14,704) $

  • 1. Payor Mix
  • 2. Clinical Program Mix

Qualifications: Several years old but concepts still valid Represents financial analysis not organizational value Does not take into consideration inter-dependencies

Clinical Program Mix

Qualifications: Several years old but concepts still valid Represents financial analysis not organizational value Does not take into consideration inter-dependencies

DH-Academic Medical Center Clinical Program Margin FY2005 (000's Omitted)

($1,000) $0 $1,000 $2,000 $3,000 $4,000 $5,000 ($6,000) ($5,000) ($4,000) ($3,000) ($2,000) C a r d i

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DH-Academic Medical Center Clinical Program Margin as a Percent of Net Revenue FY2005

(10%) 0% 10% 20% 30% 40% (50%) (40%) (30%) (20%) R a d i a t i

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Conceptual Illustration of Program Mix Base Scenario

Base Scenario Contribution Volume Margin % Discharges Margin per Discharge High Margin Sections: Cardiology 29% 2,987 $13,784,545 $4,615 Ortho 17% 1,749 $11,680,441 $6,678 46% 4,736 $25,464,986 $5,377 , , , , Low/Negative Margin Sections: OB/GYN 21% 2,130 $1,486,663 $698 Pediatrics 25% 2,565 ($1,389,955) ($542) Psych 9% 917 ($2,138,391) ($2,332) 54% 5,612 ($2,041,683) ($364) Overhead ($21,697,718) Operating Margin 100% 10,348 $1,725,586

Conceptual Illustration of Program Mix Improved Program Mix

Base Scenario Improved Program Mix Contribution Volume Margin Volume % Discharges Margin per Discharge % Discharges Margin High Margin Sections: Cardiology 29% 2,987 $13,784,545 $4,615 34% 4,092 $18,884,827 Ortho 17% 1,749 $11,680,441 $6,678 20% 2,396 $16,002,204 46% 4,736 $25,464,986 $5,377 54% 6,488 $34,887,031 Low/Negative Margin Sections: OB/GYN 21% 2,130 $1,486,663 $698 18% 2,130 $1,486,663 Pediatrics 25% 2,565 ($1,389,955) ($542) 21% 2,565 ($1,389,955) Psych 9% 917 ($2,138,391) ($2,332) 8% 917 ($2,138,391) 54% 5,612 ($2,041,683) ($364) 46% 5,612 ($2,041,683) Overhead ($21,697,718) ($21,697,718) Operating Margin 100% 10,348 $1,725,586 100% 12,100 $11,147,631

Impact of change in program mix is a $9.5 million improvement in Op Margin

Conceptual Illustration of Program Mix Statement of Operations

Base Improved Scenario Program Mix Net Revenue $145,983,323 $173,609,323 Expenses, excluding overhead ($122,560,019) ($140,763,974) Contribution Margin $23,423,304 $32,845,349 Overhead ($21,697,718) ($21,697,718) Operating Margin - $ $1,725,586 $11,147,631 Operating Margin - % 1% 6% Impact of change in program mix is a $9.5 million improvement in Op Margin

Conceptual Illustration of Program Mix Payor Mix

DHMC Average Cardiology Orthopaedics OB-GYN Pediatrics Psychiatry Medicare 37% 55% 34% 12% 0% 39% Medicaid 11% 5% 9% 14% 40% 15% Anthem 18% 12% 17% 29% 28% 12% VT Blue Cross 6% 6% 9% 9% 3% 6% CIGNA 7% 7% 6% 10% 10% 5% Other 16% 11% 20% 21% 18% 14% Self Pay/Charity 5% 4% 5% 5% 1% 9% Total 100% 100% 100% 100% 100% 100%

A Provider’s Dilema

  • Program mix and payer mix are both important

components of long term financial success

  • Program mix and payer mix are integrally linked and

can not be viewed independently

  • Decisions regarding clinical programs raise important

question about organization mission, academic programs, meeting patient needs, and public policy challenges

  • The dilemma is that a number of clinical programs

meet important patient needs, are valued by the community and support the organization’s mission but have very poor financial performance.

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Presentation Outline

1: Overview of Health

  • What is health and what determines health

2: Overview of Health Care

  • Structure of Health Care Marketplace
  • Health Policy Challenges

102

3: Financing Health Care

  • Payers, Reimbursement & Cost Shifting

4: A Provider’s Dilemma – A Real Example

  • Payer Mix
  • Clinical Program Mix

5: Case Discussion

Pediatric Endocrinology Case Discussion

  • 1. What important strategic questions or issues does this

case raise?

  • 2. What financial and operational considerations should

be explored be explored

  • 3. Do you approve this request for an additional

Pediatric Endocrinologist? What are the factors that led to your decision? A Suggestion Contract with Society 2010 I would ask each HSP group to develop by the end of the course a "Contract with Society." Each group should discuss and identify as group what each member will specifically do as residents to improve access, cost and quality. HSP Group Contract

  • As residents next year we will act to improve access by:
  • As residents next year we will act to improve cost by:
  • As residents next year we will act to improve quality by: