A LESSON IN HEALTH A LESSON IN HEALTH ECONOMICSECONOMICS

CHAPTER 13CHAPTER 13

Code Blue Health Science Edition 4Code Blue Health Science Edition 4

Lack of proper incentives Lack of proper incentives for cost controlfor cost control

In a free enterprise market In a free enterprise market economy, the market provides economy, the market provides incentives for cost control.incentives for cost control.

There is no “market mechanism” There is no “market mechanism” in healthcare.in healthcare.

Lack of Proper IncentivesLack of Proper Incentives

When people shop on the basis When people shop on the basis of price . . . of price . . .

This creates cost competition . . . This creates cost competition . . . Which provides an incentive for Which provides an incentive for

businesses to keep costs low.businesses to keep costs low. There is no such incentive in the There is no such incentive in the

healthcare industry.healthcare industry.

Lack of Price CompetitionLack of Price Competition

When is the last time you heard When is the last time you heard someone say:someone say: ““Where can I get a cut-rate price on Where can I get a cut-rate price on

a brain operation?” or a brain operation?” or ““Who is the cheapest doctor in Who is the cheapest doctor in

town?”town?”

In addition . . .In addition . . .

Most products in a market economy Most products in a market economy have prices that can be determined have prices that can be determined before they are purchased. before they are purchased.

In addition . . .In addition . . .

This is not true of healthcare.This is not true of healthcare. Doctors and hospitals don’t post their Doctors and hospitals don’t post their

charges, and . . .charges, and . . . Most patients don’t know the cost of Most patients don’t know the cost of

the products they purchase until they the products they purchase until they receive a billreceive a bill..

Are there other reasons doctors Are there other reasons doctors didn’t have a real incentive to didn’t have a real incentive to

control costs?control costs?

Yes, one of these had to do with the Yes, one of these had to do with the way doctors and hospitals were paid.way doctors and hospitals were paid.

Hospitals traditionally were paid Hospitals traditionally were paid costcost plus a small margin for profit.plus a small margin for profit.

This was called This was called cost reimbursementcost reimbursement.. Cost reimbursement provided few Cost reimbursement provided few

incentives for cost control.incentives for cost control.

Cost ControlCost Control

If you were the administrator of a If you were the administrator of a hospital that received full cost as hospital that received full cost as your payment for services, plus a your payment for services, plus a 3% profit, what is one easy way 3% profit, what is one easy way you could increase profits?you could increase profits?

Increase costs—or at least Increase costs—or at least do little to control them.do little to control them.

Hospital ReimbursementHospital Reimbursement

The government tried to correct The government tried to correct this problem in the early 1980s this problem in the early 1980s by establishing a fixed price for by establishing a fixed price for all products and services.all products and services.

This was known as fixed price This was known as fixed price payment or payment or fixed price fixed price reimbursementreimbursement..

Hospital ReimbursementHospital Reimbursement

With fixed price reimbursement, With fixed price reimbursement, hospitals and doctors would hospitals and doctors would absorb the cost of inefficiency.absorb the cost of inefficiency.

If costs were higher than the If costs were higher than the fixed payment they were to fixed payment they were to receive, they would lose money.receive, they would lose money.

Hence, there now became an Hence, there now became an incentive to control costs.incentive to control costs.

Hospital ReimbursementHospital Reimbursement

Fixed price payment is also Fixed price payment is also called prospective payment or called prospective payment or prospective reimbursement.prospective reimbursement.

Hospital ReimbursementHospital Reimbursement

One type of prospective One type of prospective reimbursement is Diagnostic reimbursement is Diagnostic Related Group (DRG) Related Group (DRG) reimbursement.reimbursement. Medicare classified all illnesses into Medicare classified all illnesses into

approximately 400 categories.approximately 400 categories. A fixed price was set for each A fixed price was set for each

product.product.

Hospital ReimbursementHospital Reimbursement

If the hospital’s actual costs to If the hospital’s actual costs to treat the patient were less than treat the patient were less than the fixed payment, they made an the fixed payment, they made an additional profit.additional profit.

If the costs were higher, the If the costs were higher, the hospital had to absorb the loss.hospital had to absorb the loss.

Hospital ReimbursementHospital Reimbursement

DRG reimbursement provided an DRG reimbursement provided an incentive to keep costs down.incentive to keep costs down.

All of this happened in about All of this happened in about 1984.1984.

Obamacare, or the Patient Obamacare, or the Patient Protection and Affordable Care Protection and Affordable Care Act, will use prospective Act, will use prospective reimbursement as one of its tools reimbursement as one of its tools to control costs.to control costs.

Other IncentivesOther Incentives

Another way that the Another way that the government and the insurance government and the insurance industry has tried to provide industry has tried to provide incentives for cost control is incentives for cost control is through through managed caremanaged care..

Managed care tries to Managed care tries to keep costs down by:keep costs down by:

Negotiating lower prices with Negotiating lower prices with doctors and hospitalsdoctors and hospitals

Mandating that patients go to Mandating that patients go to specific doctors and hospitalsspecific doctors and hospitals

Making patients get a second Making patients get a second opinion before getting an opinion before getting an expensive procedure or operationexpensive procedure or operation

Encouraging patients to use Encouraging patients to use generic drugsgeneric drugs

Managed CareManaged Care

Not everyone likes managed Not everyone likes managed care.care. Doctors feel that insurance Doctors feel that insurance

companies are telling them how to companies are telling them how to practice medicine.practice medicine.

Patients don’t like being told where Patients don’t like being told where to go for treatment.to go for treatment.

The issue is cost versus choice.The issue is cost versus choice.

If you don’t like the If you don’t like the system . . .system . . .

Then you and those of Then you and those of your generation will your generation will have to fix it.have to fix it.

The students in your The students in your class who go on to class who go on to become healthcare become healthcare professionals, will face professionals, will face problems far more problems far more severe than any severe than any previous generation of previous generation of healthcare professionals.healthcare professionals.

Redesign of SystemRedesign of System

If the healthcare delivery system of If the healthcare delivery system of tomorrow is to meet the needs of the tomorrow is to meet the needs of the American population, physicians, American population, physicians, nurses and other health professionals nurses and other health professionals will have to take the system back will have to take the system back from the businessmen, accountants from the businessmen, accountants and actuaries.and actuaries.

Both groups are needed, of course, Both groups are needed, of course, but more input is needed from but more input is needed from doctors and nurses.doctors and nurses.

Redesign of SystemRedesign of System

In a sense, you will play the role of In a sense, you will play the role of Wes Douglas, except you’ll be trying Wes Douglas, except you’ll be trying to save the American healthcare to save the American healthcare delivery system, instead of just one delivery system, instead of just one hospital.hospital.

To fix the system, you will need to To fix the system, you will need to understand how it works.understand how it works.

The EndThe End

Children’s Hospital—Buffalo, New York