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Economics of healthcare and its impact on health and human services in

the Seacoast

May 2, 2012

“…to raise new ideas and improve policy debates through quality information and analysis on issues shaping New Hampshire’s future.”

Dennis DelayEconomist, NHCPPS

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Although we focus on energy, health care growth absorbs more of your income than changes in oil prices.

Source: Center for Medicare and Medicaid Services (CMS), US Dept of Energy

New Hampshire Expenditures on Health Care and Energy as a Percent of Personal Income

0

5

10

15

20

25

1981

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Per

cen

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amp

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Health Care% of PersonalIncomeEnergy Expenditures % ofPersonal Income

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More expensive

And growing faster relative to oureconomic competitors

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High Quality, High CostDashboard 2011 Z Scores for Quality vs. Cost 2011

ALAKAZ AR

CA

CO

CT

DE

FLGA

HI

ID

IL

IN

IA

KSKYLA

ME

MD

MA

MIMN

MS

MO

MT

NE

NV

NH

NJ

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NYNC

ND

OH

OK

OR

PA

RI

SC

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TN

TX

UT

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VA

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-8.0

-6.0

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-2.0

0.0

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6.0

$4,000 $5,000 $6,000 $7,000 $8,000 $9,000 $10,000 $11,000 $12,000

Spending per Person

Qua

lity

BestHigh Quality,Low Cost

Worst: Low Quality,High Cost

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Providers: Hospitals and Physicians are the primary source of growth

NH Hospital spending rose rapidly post 1998, physicians after 2003

Source: Center for Medicare and Medicaid Services (CMS), and NHCPPS estimates

NH Personal Health Care Spending in 2010 Dollars, 1990-2010

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

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Year

Exp

end

itu

re (

$ m

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on

s)

Hospital CarePhysician ServicesOther Professional ServicesDental ServicesHome Health CarePrescription DrugsOther Non-Durable Medical ProductsDurable Medical ProductsNursing Home CareOther Personal Health Care

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Economists study markets:

•Health Care Markets include:

•Professional services market (nursing, physicians)

•Institutional services market (hospitals, nursing homes, ambulatory care)

•Health care financing (how do we pay for it?)

•Other inputs (pharmacy, technology)

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What is required for a perfect market?

•Lots of buyers and sellers!

•No barriers to entry, or exit

•Perfect information (everybody knows cost and quality)

•No participant with market power to set prices

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Market Actions - Example: 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.

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Figure 1: Revenue Structure of a Health Care Provider

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% of Gross Charges by Payer

% o

f C

ost

Pai

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Insurance45%

Self-Pay7%

Medicare41%

Medicaid7%

0% 100%

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)

Break Even

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Hospital Cost-Shifting in 2009(Aggregate of 26 NH Acute Care Hospital Only)

0%

50%

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250%

Percent of Gross Charges

Pa

ym

en

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s P

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t o

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os

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3rd Party Payers (insurance)44%

Medicare40%

Medicaid8%

bad debt & charity

5%

Total amount cost-shifted: $531 million Net operating gain: $216 million (Post-Tax)Operating margin: 5.6%

other3%

The Costs of NH’s Health Care System: Hospital Prices, Market Structure, and Cost-Shifting (NHCPPS, March 2012)

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Why does cost shifting confuse economists?

• Cost shifting occurs when negotiated private prices are raised in reaction to lower administered prices (by the government).

• “Some economists distinguish between cost shifting and price discrimination. Price discrimination is defined as different prices charged to different payers for similar services. Cost shifting is defined more narrowly as a dynamic response by hospitals to a reduction in Medicare payments, in the form of a fully or partially compensating increase in prices charged to private insurers.”

James Robinson, Health Affairs, July 2011

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Cost shifting really means something else:

• For cost shifting behavior to make economic sense, a hospital must possess some monopoly power that it has not already exploited.

• Price discrimination seen in industries with high capital costs, and where consumers are unable to resell the service.

• “Shift” depends on the magnitude of the price elasticity of demand.

Source: REXFORD E. SANTERRE, Health Economics, 2009

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Health Care is NOT A Traditional Market System

• Consumers have limited, if any, access to information on price or quality.

• There are institutional monopolies.• The seller determines what the consumer

will get; supply drives demand.• Important health care services are often

obtained at a time of personal crisis.• Government regulation and programs alter

provider behavior.

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Growth in New Hampshire Health Care Expenditures

14.4%

12.2%

13.2%12.9%

12.6%

15.9%

13.0%

14.9%

12.7%

8.2%

10.7%

8.6%

3.5%

8.8%

7.3%

6.5%

8.0%

10.2%

6.4%

5.4%

8.6%8.6%

9.7%9.2%

8.3%

7.1%

4.9%4.4%

4.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

1982

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State Health Expenditures

Hopeful Signs:

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But here come the baby boomers ….

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Goals for the Health Care System

• Low Cost (for a given level of quality)• High Quality

– Constant health improvement of population– Use of best practices in treatment of conditions

(where they exist)– Satisfaction with healthcare system

• Access (and equity)– Health resources are distributed in a way consistent

with our expressed demands (income, age, gender, etc..)

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Final Thought Piece on Health Care Costs

•A study by Boyle et al. (1983) showed that it cost $2,900 per life-year gained and $3,200 per quality-adjusted life-year gained to use neonatal intensive care to increase the survival rates of low-birth weight infants weighing from 1,000 to 1,499 grams.

•For newborns weighing between 500 and 999 grams, the figures were $9,300 and $22,400, respectively.

•The study results indicated that neonatal intensive care has a higher benefit/cost for newborns weighing between 1,000 and 1,499 grams than for lower birth weight children.

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Want to learn more?

• Online: nhpolicy.org• Facebook: facebook.com/nhpolicy• Twitter: @nhpublicpolicy• Our blog: policyblognh.org• (603) 226-2500

“…to raise new ideas and improve policy debates through quality information and analysis on issues shaping New Hampshire’s future.”

Board of DirectorsSheila T. Francoeur, Chair

David Alukonis

Michael Buckley

William H. Dunlap

Eric Herr

Richard Ober

James Putnam

Stephen J. Reno

Stuart V. Smith, Jr.

Donna Sytek

Brian F. Walsh

Martin L. Gross, Chair Emeritus

John D. Crosier, Sr.,

Todd I. Selig

Kimon S. Zachos

Directors Emeritus