Who’s Paying For Health Care?

America spent 17.3% of its gross domestic product on health care in 2009 (1). If you break that down on an individual level, we spend $7,129 per person each year on health care…more than any other country in the world (2). With 17 cents of every dollar Americans spent keeping our country healthy, it’s no wonder the government is determined to reform the system. Despite the overwhelming attention health care is getting in the media, we know very little about where that money comes from or how it makes its way into the system (and rightfully so…the way we pay for health care is insanely complex, to say the least). This convoluted system is the unfortunate result of a series of programs that attempt to control spending layered on top of one another. What follows is a systematic attempt to peel away those layers, helping you become an informed health care consumer and an incontrovertible debater when discussing “Health Care Reform.”

Who’s paying the bill?

The “bill payers” fall into three distinct buckets: individuals paying out-of-pocket, private insurance companies, and the government. We can look at these payors in two different ways: 1) How much do they pay and 2) How many people do they pay for?

The majority of individuals in America are insured by private insurance companies via their employers, followed second by the government. These two sources of payment combined account for close to 80% of the funding for health care. The “Out-of-Pocket” payers fall into the uninsured as they have chosen to carry the risk of medical expense independently. When we look at the amount of money each of these groups spends on health care annually, the pie shifts dramatically.

The government currently pays for 46% of national health care expenditures. How is that possible? This will make much more sense when we examine each of the payors individually.

Understanding the Payors

Out-of-Pocket

A select portion of the population chooses to carry the risk of medical expenses themselves rather than buying into an insurance plan. This group tends to be younger and healthier than insured patients and, as such, accesses medical care much less frequently. Because this group has to pay for all incurred costs, they also tend to be much more discriminating in how they access the system. The result is that patients (now more appropriately termed “consumers”) comparison shop for tests and elective procedures and wait longer before seeking medical attention. The payment method for this group is simple: the doctors and hospitals charge set fees for their services and the patient pays that amount directly to the doctor/hospital.

Private Insurance

This is where the whole system gets a lot more complicated. Private insurance is purchased either individually or is provided by employers (most people get it through their employer as we mentioned). When it comes to private insurance, there are two main types: Fee-for-Service insurers and Managed Care insurers. These two groups approach paying for care very differently.

Fee-for-Service:

This group makes it relatively simple (believe it or not). The employer or individual buys a health plan from a private insurance company with a defined set of benefits. This benefit package will also have what is called a deductible (an amount the patient/individual must pay for their health care services before their insurance pays anything). Once the deductible amount is met, the health plan pays the fees for services provided throughout the health care system. Often, they will pay a maximum fee for a service (say $100 for an x-ray). The plan will require the individual to pay a copayment (a sharing of the cost between the health plan and the individual). A typical industry standard is an 80/20 split of the payment, so in the case of the $100 x-ray, the health plan would pay $80 and the patient would pay $20…remember those annoying medical bills stating your insurance did not cover all the charges? This is where they come from. Another downside of this model is that health care providers are both financially incentivized and legally bound to perform more tests and procedures as they are paid additional fees for each of these or are held legally accountable for not ordering the tests when things go wrong (called “CYA or “Cover You’re A**” medicine). If ordering more tests provided you with more legal protection and more compensation, wouldn’t you order anything justifiable? Can we say misalignment of incentives?

Managed Care:

Now it gets crazy. Managed care insurers pay for care while also “managing” the care they pay for (very clever name, right). Managed care is defined as “a set of techniques used by or on behalf of purchasers of health care benefits to manage health care costs by influencing patient care decision making through case-by-case assessments of the appropriateness of care prior to its provision” (2). Yep, insurers make medical decisions on your behalf (sound as scary to you as it does to us?). The original idea was driven by a desire by employers, insurance companies, and the public to control soaring health care costs. Doesn’t seem to be working quite yet. Managed care groups either provide medical care directly or contract with a select group of health care providers. These insurers are further subdivided based on their own personal management styles. You may be familiar with many of these sub-types as you’ve had to choose between then when selecting your insurance.

  • Preferred Provider Organization (PPO) / Exclusive Provider Organization (EPO):This is the closet managed care gets to the Fee-for-Service model with many of the same characteristics as a Fee-for-Service plan like deductibles and copayments. PPO’s & EPO’s contract with a set list of providers (we’re all familiar with these lists) with whom they have negotiated set (read discounted) fees for care. Yes, individual doctors have to charge less for their services if they want to see patients with these insurance plans. An EPO has a smaller and more strictly regulated list of physicians than a PPO but are otherwise the same. PPO’s control costs by requiring preauthorization for many services and second opinions for major procedures. All of this aside, many consumers feel that they have the greatest amount of autonomy and flexibility with PPO’s.
  • Health Management Organization (HMO): HMO’s combine insurance with health care delivery. This model will not have deductibles but will have copayments. In an HMO, the organization hires doctors to provide care and either builds its own hospital or contracts for the services of a hospital within the community. In this model the doctor works for the insurance provider directly (aka a Staff Model HMO). Kaiser Permanente is an example of a very large HMO that we’ve heard mentioned frequently during the recent debates. Since the company paying the bill is also providing the care, HMO’s heavily emphasize preventive medicine and primary care (enter the Kaiser “Thrive” campaign). The healthier you are, the more money the HMO saves. The HMO’s emphasis on keeping patients healthy is commendable as this is the only model to do so, however, with complex, lifelong, or advanced diseases, they are incentivized to provide the minimum amount of care necessary to reduce costs. It is with these conditions that we hear the horror stories of insufficient care. This being said, physicians in HMO settings continue to practice medicine as they feel is needed to best care for their patients despite the incentives to reduce costs inherent in the system (recall that physicians are often salaried in HMO’s and have no incentive to order more or less tests).

The Government

The U.S. Government pays for health care in a variety of ways depending on whom they are paying for. The government, through a number of different programs, provides insurance to individuals over 65 years of age, people of any age with permanent kidney failure, certain disabled people under 65, the military, military veterans, federal employees, children of low-income families, and, most interestingly, prisoners. It also has the same characteristics as a Fee-for-Service plan, with deductibles and copayments. As you would imagine, the majority of these populations are very expensive to cover medically. While the government only insures 28% of the American population, they are paying for 46% of all care provided. The populations covered by the government are amongst the sickest and most medically needy in America resulting in this discrepancy between number of individuals insured and cost of care.

The largest and most well-known government programs are Medicare and Medicaid. Let’s take a look at these individually:

Medicare:

The Medicare program currently covers 42.5 million Americans. To qualify for Medicare you must meet one of the following criteria:

  • Over 65 years of age
  • Permanent kidney failure
  • Meet certain disability requirements

So you meet the criteria…what do you get? Medicare comes in 4 parts (Part A-D), some of which are free and some of which you have to pay for. You’ve probably heard of the various parts over the years thanks to CNN (remember the commotion about the Part D drug benefits during the Bush administration?) but we’ll give you a quick refresher just in case.

  • Part A (Hospital Insurance): This part of Medicare is free and covers any inpatient and outpatient hospital care the patient may need (only for a set number of days, however, with the added bonus of copayments and deductibles…apparently there really is no such thing as a free lunch).
  • Part B (Medical Insurance): This part, which you must purchase, covers physicians’ services, and selected other health care services and supplies that are not covered by Part A. What does it cost? The Part B premium for 2009 ranged from $96.40 to $308.30 per month depending on your household income.
  • Part C (Managed Care): This part, called Medicare Advantage, is a private insurance plan that provides all of the coverage provided in Parts A and B and must cover medically necessary services. Part C replaces Parts A & B. All private insurers that want to provide Part C coverage must meet certain criteria set forth by the government. Your care will also be managed much like the HMO plans previously discussed.
  • Part D (Prescription Drug Plans): Part D covers prescription drugs and costs $20 to $40 per month for those who chose to enroll.

Ok, now how does Medicare pay for everything? Hospitals are paid predetermined amounts of money per admission or per outpatient procedure for services provided to Medicare patients. These predetermined amounts are based upon over 470 diagnosis-related groups (DRGs) or Ambulatory Payment Classifications (APC’s) rather than the actual cost of the care rendered (interesting way to peg hospital reimbursement…especially when the Harvard economist who developed the DRG system openly disagrees with its use for this purpose). The cherry on top of the irrational reimbursement system is that the amount of money assigned to each DRG is not the same for each hospital. Totally logical (can you sense our sarcasm?). The figure is based on a formula that takes into account the type of service, the type of hospital, and the location of the hospital. This may sound logical but often times this system fails.

Medicaid:

Medicaid is a jointly funded (funded by both federal and state governments) health insurance program for low-income families. Eligibility rules vary from state to state and factors in age, pregnancy, disability, income and resources. Poverty alone does not qualify an individual for Medicaid (there is currently no government-provided insurance for the American poor…despite the fact that almost all first world countries have such a system…enter the current health care debate) but is a significant factor in Medicaid eligibility. Each state operates its own Medicaid program but must adhere to certain federal guidelines to receive matching federal funds (you may be familiar with California’s MediCal, Massachusetts’ MassHealth and Oregon’s Oregon Health Plan due to their recent media coverage). Medicaid payments currently assist nearly 60 percent of all nursing home residents and about 37 percent of all childbirths in the United States.

How are the bills paid?

We now understand who is paying the bill but we have yet to cover how those bills are paid. There are two broad divisions of arrangements for paying for and delivering health care: fee-for-service care and prepaid care.

Fee-for-Service

As we mentioned briefly while discussing PPO’s, in a fee-for-service structure, consumers select a provider, receive care (a.k.a. “service”) from the provider, and incur expenses (a.k.a. “a fee”) for the care. Deductibles and copayments are also required as previously discussed. Pretty simple. The physician is then reimbursed for their services in part by the insurer (i.e. a private insurance company or the government) and in part by the patient, who is responsible for the balance unpaid by the insurer (the return of the unanticipated medical bill despite your overpriced insurance). Again, the major downfall of the fee-for-service approach is that medical professionals are incentivized to provide services (and by this we mean any and all services they can legally request or must request to be protected legally), some of which may be nonessential, to increase their revenue and/or “C.Y.A.” (revenue that has steadily decreased as insurance companies continue to lower the amount they pay medical professionals for their services).

Fee Schedule

A fee schedule operates in the same way that Fee-for-Service does with one exception: instead of using the “usual, customary, and reasonable” amount to reimburse medical professionals, states set fees to be paid for specific procedures and services. The reimbursement is very low ($.10-.15 on the dollar) and barely covers the actual direct cost of providing the care. Physicians may chose to opt into the plan or not (starting to see why a doctor might not be so excited about this plan?). Would you sign up to be paid 10 cents for every dollar you charged for your work? Try the insurance reimbursement approach next time you go out to eat. We’ll come bail you out of the Big House if things go awry. What happens when the insurance system does this? You get the Wal-Mart approach to medicine (high volume, low quality). Not the kind of heath care we recommend.

Pre-Paid

Pre-paid health care? Like a phone card? Not exactly–but close. The pre-paid system evolved out of the insurance company’s desire to share its risk ( a.k.a “pooled risk”) with health care providers. Essentially, they wanted the doctors to have some skin in the game. In the pre-paid system, insurers make arrangements with health care providers to provide agreed-upon covered health care services to a given population of consumers for a (usually discounted) set price-the per-person premium fee-over a particular time period. What does that mean? It means that Dr. Bob gets paid, say, $30 per month to take care of Joe the Plumber including his blood work and x-rays. If Dr. Bob spends less than that caring for Joe, he makes money. If Joe is sick every month and needs lots of tests and follow-up visits, Dr. Bob could lose money caring for Joe. The set monthly fee paid to the doctor for taking care of a patient is set up on a per-member, per-month (PMPM) rate called a “capitated fee.” The provider receives the capitated fee per enrollee regardless of whether the enrollee uses health care services and regardless of the quality of services provided (not a good thing in our book). Theoretically, providers should become more prudent and subsequently provide services in a more cost effective manner because they are bearing some of the risk. Often times, however, less care is provided than is needed in hopes of saving money and increasing profits. In addition, physicians are incentivized to cherry pick the youngest and healthiest patients because these patients typically require less care (i.e. they are cheaper to keep healthy). We like that doctors are encouraged to keep patients healthy but we have to worry about the ways in which they are being encouraged to reduce costs (as little care as possible?). Again, the incentive system falls short and encourages providers to act unethically.

The Take Home Message:

Health Care in the United States today is complex and messy at best. The layers on top of layers of failed attempts to correct the system continue to encourage the wrong behavior in both patients (out of fear of medical bills) and providers (out of fear of bankruptcy). We have yet to provide every American citizen with medical care (something that goes without saying in most 1st World countries…even Cuba has it!). We spend more money on caring for our citizens than any country in the world yet we continue to lag behind in terms of national health outcomes. We think it’s safe to say that we’re not getting the best bang for our buck. The ultimate solution? We wish we knew. Only time will tell where the system goes from here. Our goal: to help you better understand the system as it stands today in hopes of developing a more effective, efficient, and comprehensive system for the future. Are you with us?

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Healthcare Stock Investing – Pros and Cons

There are plenty of things both in favor of and against investing in healthcare stocks. Well before doing it, it’s going to be immensely important to make sure you know and understand these advantages and disadvantages. Stock investing in the healthcare sector is associated with both benefits and drawbacks that you need to know about. This article explains them. You’ll have to comprehend these to be able to make the ideal decision for you.Benefits: Reasons In Favor Of investing in healthcare stocks1. Healthcare stocks are consistent performers.The performance of healthcare stocks is relatively consistent compared with many other market sectors.2. Steady demand for healthcare products.Another good reason for stock investing in the healthcare sector is that no matter what the economy is there is always a need for healthcare and medical products.. This provides the additional advantage of avoiding the extreme ups and downs seen in other categories of stocks which are much more susceptible to being affected by the general economy, that could defend against making the mistake of losing a huge percentage of your investment all at once if a recessions occurs..3. Investment in healthcare helps medical research.After that there is the advantage of funneling capital into healthcare research and development.. It is crucial because doing so will help all of us and our children as we age, and perhaps ultimately help fund efforts which find cures for major diseases like cancer and heart disease.. If you take that into mind, then it makes sense to consider investing in stocks in the healthcare sector.But that’s the pros of healthcare investing. There’s a negative side as well. Here’s a discussion of some of the drawbacks.Drawbacks: Factors Against Investing in Healthcare Stocks1. Making the right picks may require more scientific knowledge than you have.Any time you are picking from medical device or pharmaceutical stocks, it will have the affect of requiring a deep understanding of the underlying medical factors. Consider whether thiIt works as a valid reason to prevent yourself from doing it.2. The last cause in avoiding investing in healthcare stocks is needing to watch marketplace events closely for major milestones such as FDA approvals. I advise people to consider this point seriously, because it could lead on to a major drop in the stock price if a significant event such as an FDA decision goes against the company if you determine to anyway.So that is it. We have now seen and reviewed the advantages and disadvantages of investing in healthcare stocks. It’s not actually universal, not for all, nevertheless it will definitely work for a great many people. You need to think about the info presented to make your personal determination, for or against. You will be able to make an optimal decision based on the details offered here in this article.

Healthcare Decision Support Systems

IT Efficiency: Ontology Programming Holds the Key The seamless integration of knowledge and data is indispensible to today’s modern healthcare decision support systems (DSS). A healthcare organization that thoroughly understands its patients and is able to respond quickly to their needs, scores highly with them-and this has become an extremely important competitive component in today’s ever-more interconnected world where patient feedback can positively or negatively affect an organization’s reputation and bottom line.The patient care world is complex, with various information systems being utilized to streamline and automate patient care processes.Fortunately, there is a new approach to IT efficiency vis-a-vis ontological engineering-or ontology programming-that is possibly the most significant benefit to ensuring accurate data integration, which fosters a better understanding of patient needs, thus resulting in better patient care and excellent patient outcomes.Ontological engineering excels at extracting knowledge and critical information from the various information systems within a healthcare decision support system (or its organizational databases). Ontology programming reduces often difficult data integration issues and promotes data reuse, data sharing, and common vocabularies between the information systems, from patient intake to patient discharge.For healthcare organizations to understand their patients better, data across the entire organization or spectrum of information systems involved in patient care must to be analyzed. Knowledge from different areas or “domains” (e.g., the patient-entry process domain, hospitalization and treatment domains, and billing and insurance domains) must to be extracted in order to accurately interpret quality of care.Detailed knowledge is also required to interpret patient responses to the various care options exercised from the time of entry into the healthcare facility through final discharge. In addition, quality healthcare organizations strive to improve their existing processes and analyze post-care data in order to determine areas of improvement and initiate appropriate programs. Therefore, the accurate compilation and correlation of patient data is essential during the care process-both individually and in aggregate with other patient data-to determine potential process improvement steps.As mentioned previously, healthcare organizations also benefit from their patients’ recovering better and more quickly as a result of higher quality care. This is, in no small part, driven by efficient information systems. Patient care results are reflected in quality reports issued by premier organizations such as JCAHO (Joint Commission for Accreditation for Healthcare Organizations). As of 2009, JCAHO reports include patient satisfaction data, as well, thus making it even more important to understand patient information effectively and utilize to it to render care that leads to better patient satisfaction.Accurate knowledge across intra-organizational domains can only be extracted when healthcare decision support systems are able to exchange relevant data with each other-which is not always possible with current configurations.Even if the numerous systems within an organization can connect to each other through common computer interfaces, they may have stored patient data differently,rendering information exchange virtually impossible and creating a silo effect. Additionally, the context in which the information is used may vary from system to system,making it even more difficult to correlate data across various platforms and systems within the organization. Finally, data consistency and data integrity issues arise as each silo information system is further customized to optimize the information system’s performance.Therefore, to achieve a comprehensive and accurate individual patient view across the entire patient care spectrum of an organization, different information systems-based reports may have to be compiled separately with data correlated between them. The results will then need to be represented in a single, coherent report. This type of data correlation may include the mapping of various customer names for a single patient, as an example. Obviously, this type of system is not only vulnerable to error and to data integrity and consistency issues, but it is also quite inefficient and, therefore, needlessly costly.Data correlation, integrity, and integration issues are not confined within an organization’s systems only. Health care organizations rely on HIE (Healthcare Information Exchange) to communicate with external entities. HIE is used to move clinical information between different information systems from various providers (i.e. test labs, insurance companies, and other healthcare facilities) without losing the meaning of the information exchanged. These systems typically use established standards for data exchange, such as SNOMED CT, ICD-9 and -10, and other HIE standards.Periodic updates are required, and organizations must ensure that they are in compliance in order to participate in data exchanges with other providers. Naturally, whenever any data changes occur, the cost and time required to modify multiple systems within an organization can be staggering, but without the use of ontological engineering, the higher costs must be borne, as system modifications are mandatory.Whether the data reside internally or external sources are employed for HIE, a healthcare organization faces the common issues of data mapping, data integration, reuse, and data sharing.  Whenever data change, or new relationships between data are discovered, organizations expend valuable resources in time and money adjusting databases across various systems in an attempt to keep them aligned with each other. This absorbs important resources, taking them away from the core focus and value proposition of the organization-that of providing quality patient care.When data change, especially internal organizational data, conventional technologies (as in “relational” databases) require changes to their database structures and schemas, potentially leading to major regression testing of the systems after the changes have been completed.  This must be accomplished in order to ensure that nothing is deleted or corrupted after the changes are made, and is quite naturally, another costly step-both in terms of time and resources. Information Technology departments have tried to respond to data integrity and data integration issues across various systems within an organization by building a data warehouse that acts as a central repository for most, or all, of the inter-related systems. However, the solution is only partially successful. Often times, competing interests from various internal “stakeholders” in different information systems can lead to data that is stored in a manner is favorable to some information systems, but not others. This, of course, potentially compromises data access and reuse by other systems.In addition, since the entire organization’s data cannot be migrated to a data warehouse simultaneously, some systems are migrated before others, and the entire migration process may take as long as a year or more to complete in a large health care organization. In the interim, data across the enterprise changes, and the whole cycle of re-aligning data must start anew. There have been proposed solutions to address this and other related problems, but they each leave something to be desired.Ontology programming can help reduce data integration, sharing, and reuse pains to quite an extent. By definition, ontologies are a formal representation of knowledge by a set of concepts within a domain. They not only store data in a database, but also store relationships, including hierarchical relationships, between data. This ability distinguishes ontological engineering from standard relational databases and provides the flexibility of updating data and relationships between them. Ontologies are also able to add newly discovered relationships without the necessity of significantly changing the core database or requiring extensive programming efforts-unlike typical databases currently in use.  They also excel at removing term confusion and providing data mapping capabilities, which vastly promotes improved data share and data reuse across an organization’s information systems.For healthcare organizations, as well as other large business enterprises, the practical, time-saving applications of a system built on ontology programming are quite extensive. We know that ontological engineering provides the ability to extract knowledge contained within applications and information systems across the various domains within an organization, but it is also very useful for capturing “real world decisions” made by humans and converting it into computer format. The result of this capturing of knowledge across domains by SMEs (Subject Matter Experts) and healthcare providers leads to much more consistent query results whenever similar conditions are encountered in the future.Such information system architecture can significantly reduce medical errors and enhance patient care. This can be accomplished, for instance, by the capturing of a healthcare professional’s diagnosis of a particular medical condition and other relevant data. Once the data are entered into the ontological system, it will consistently provide the same results for similar conditions in the future and offer the diagnostics and conclusions as an aid to other healthcare professionals.Subsequently, a healthcare professional may choose to exercise the same diagnostics (or treat the patient differently according to differences in patient circumstances), but the healthcare decision support system’s information can now provide an important, relevant checkpoint based upon the previous diagnostic information.In conclusion, the use of ontology programming in the healthcare field provides a significant reduction in data integration issues and-because these technologies are superior extractors of knowledge across multiple information systems and can add new relationships between such systems with relative ease-they provide the flexibility to change data with far less effort and cost than standard systems now require.Consequently, ontological engineering is able to provide an invaluable component to improved patient care and outcomes by supporting critical healthcare processes and decision-making. The superior integration of knowledge and data within healthcare organizations may at first appear prosaic, but it is nothing short of revolutionary in its potential to affect organizational performance and quality care.