Economics for Healthcare Managers PDF

CHAPTER AN OVERVIEW OF THE HEALTHCARE FINANCING SYSTEM...

CHAPTER AN OVERVIEW OF THE HEALTHCARE FINANCING SYSTEM 3 Learning Objectives After reading this chapter, students will be able to explain why health insurance is common, use standard health insurance terminology, identify major trends in health insurance, describe the major problems faced by the current insurance system, and find current information about health insurance. Key Concepts Insurance pools the risks of high costs. Moral hazard and adverse selection complicate risk pooling. About 91 percent of the US population has medical insurance. Consumers pay for most medical care indirectly, through taxes and insurance premiums. Most consumers obtain coverage through an employer- or government- sponsored plan. Managed care has largely replaced traditional insurance. Copyright © 2023. Health Administration Press. All rights reserved. Managed care plans differ widely. 3.1 Introduction 3.1.1 Paying for Medical Care Consumers pay for most medical care indirectly, through insurance. In 2019, insurance paid for 77 percent of healthcare spending (CMS 2020). Health- care managers therefore must understand the structure of private and public insurance programs because much of their organizations’ revenues will be shaped by insurance. 39 CH03.indd Lee, 39 Economics for Healthcare Managers, Fifth Edition, Health Administration Press, 2023. ProQuest Ebook Central, Robert H.. 02/12/22 2:21 PM http://ebookcentral.proquest.com/lib/ucf/detail.action?docID=7179271. Created from ucf on 2025-01-28 20:57:54.  40 Ec o n o m ic s fo r H e a l th c a re M a n a g e r s Managers must also be aware that consumers ultimately pay for health- care products, a key fact that is obscured by the complex structure of the US healthcare financing system. A prudent manager will anticipate a reaction when healthcare spending invokes higher premiums or taxes, thereby forcing consumers to spend less on other goods and services. Some consumers may drop coverage, some employers may reduce benefits, and some plans may reduce payments. This reaction need not occur if a consensus has emerged in support of increased spending, but even then, managers should be wary of the profound effects that changes to insurance plans can mean for them. Finally, managers must consider more than insurance payments. Even though the bulk of healthcare firms’ revenue comes from insurers, consumers do pay directly for some products. Consumers directly spent more than $400 billion on healthcare products in 2019 (CMS 2020). No firm should ignore this huge market. coinsurance 3.1.2 Direct Spending A form of cost Although the amount of direct consumer spending is high, it accounts for sharing in which a patient pays a only a fraction of total healthcare spending. Exhibit 3.1 depicts a healthcare share of the bill, market in general terms—consumers directly pay the full cost of some ser- not a set fee. vices and part of the costs of other services. These direct payments are often copayment called out-of-pocket payments. For example, a consumer’s payment for the A fee the patient full cost of a pharmaceutical product, a 20 percent coinsurance payment to must pay in a dentist, and a $25 copayment to a child’s pediatrician are all considered addition to the amount paid by out-of-pocket payments. Insurance beneficiaries make some out-of-pocket insurance. payments for services that are not covered, for services in excess of a policy’s EXHIBIT 3.1 The Flow Out-of-pocket payments of Funds in Healthcare Copyright © 2023. Health Administration Press. All rights reserved. Markets Consumers Providers Premiums and taxes Third parties CH03.indd Lee, 40 Economics for Healthcare Managers, Fifth Edition, Health Administration Press, 2023. ProQuest Ebook Central, Robert H.. 02/12/22 2:21 PM http://ebookcentral.proquest.com/lib/ucf/detail.action?docID=7179271. Created from ucf on 2025-01-28 20:57:54.  C h a p te r 3: An O ver v iew of the H ealthc are F inanc ing Sy stem 41 coverage limits, or for deductibles (amounts that consumers are required to deductible spend before their plan pays anything). Another term for out-of-pocket pay- The amount that a consumer ments is cost sharing. Economics teaches us that a well-designed insurance must pay before plan usually incorporates some cost sharing. We will explore this concept in insurance covers detail in the discussion of demand in chapter 7. any healthcare costs. Insurance payments are the largest source of revenue for most health- care providers. In 2019, they represented 87 percent of payments to hos- cost sharing The general pitals, 80 percent of payments to physicians, and 65 percent of payments term for direct to nursing homes (CMS 2020). Because insurance affects most healthcare payments purchases, its structure has a profound influence on the healthcare system to providers and healthcare organizations. by insurance beneficiaries. The extent of insurance in the healthcare market distinguishes it from (Deductibles, most other markets. Insurance has three important effects on patients: copayments, and coinsurance are forms of cost It protects them against high healthcare expenses, which is the main goal. sharing.) It encourages them to use more healthcare services, which is a side effect. It limits their autonomy in healthcare decision-making, which is not a goal. Medicare An insurance Nonetheless, the advantages of insurance exceed its disadvantages. As program for older and disabled discussed in chapter 2, the share of direct payments for healthcare has fallen Americans that steadily over the past 50 years. is administered by the Centers for Medicare & 3.1.3 Sources of Insurance Medicaid Services. Nearly 325 million Americans had some health insurance coverage in 2019 Medicaid (Keisler-Starkey and Bunch 2021). Only 1 percent of those older than 65 lacked A collection coverage; only 5 percent of those younger than 18 lacked coverage; and 12 of state-run percent of those aged 18 to 64 lacked coverage. Although 27 percent of those insurance programs that older than 65 had employment-based insurance, 93 percent had Medicare meet standards coverage (meaning that many had duplicate coverage). Employment­-based Copyright © 2023. Health Administration Press. All rights reserved. set by the Centers insurance was the most common form of coverage for those younger than 65. for Medicare & Fifty-six percent of children had employment-based insurance, and 39 percent Medicaid Services and serve those had Medicaid. Sixty-three percent of those aged 18 to 64 had employment- with incomes low based insurance (and only 15 percent had Medicaid). In section 3.2, we will enough to qualify explore why employment-based insurance is so prevalent. for their state’s program. Medicaid enrollment has 3.1.4 The Uninsured increased by more For many years, the share of the population without medical insurance rose than 20 percent as a result of state steadily, even as insurance payments rose as a share of total spending. Since expansions under the enactment of the Affordable Care Act (ACA) in 2010, the percentage of the Affordable the population without health insurance has fallen sharply. The share of those Care Act. CH03.indd Lee, 41 Economics for Healthcare Managers, Fifth Edition, Health Administration Press, 2023. ProQuest Ebook Central, Robert H.. 02/12/22 2:21 PM http://ebookcentral.proquest.com/lib/ucf/detail.action?docID=7179271. Created from ucf on 2025-01-28 20:57:54.  42 Ec o n o m ic s fo r H e a l th c a re M a n a g e r s under age 65 without insurance was 18.2 percent in 2010. By 2016, it was 8.0 percent (Keisler-Starkey and Bunch 2021). Uninsured consumers enter healthcare markets with three significant disadvantages. First, they must finance spending from their own resources or the resources of family, friends, and well-wishers. If these funds are not adequate, they must do without care or rely on charity care. The uninsured do not have access to the vast resources of modern insurance companies when large healthcare bills arrive. Second, unlike most insured customers, unin- sured customers may be expected to pay list prices for services. The majority of insured consumers are covered by plans that have secured discounts from providers. For example, none of the major government insurance plans and few private insurance plans pay list prices for care. Although, in principle, unin- sured patients could negotiate discounts, this practice is not routine. Third, the uninsured tend to have low incomes. In 2019, 15.9 percent of Americans with incomes below the federal poverty level did not have health insurance, compared with only 3.0 percent of those with annual household incomes four times the poverty level and higher (Keisler-Starkey and Bunch 2021). The combination of low income and no insurance often creates barri- ers to accessing care. For example, in 2019, 32 percent of uninsured adults reported going without care when they had a medical problem (Tolbert, Orgera, and Damico 2020). This rate was more than five times that for well- insured adults. Delaying or forgoing care can lead to worse health outcomes. 3.2 What Is Insurance, and Why Is It So Prevalent? 3.2.1 What Insurance Does Insurance pools the risks of healthcare costs, which have a skewed distribu- tion. Most consumers have modest healthcare costs, but a few incur crushing sums. For example, in 2014, 1 percent of the noninstitutionalized population spent 23 percent of the total, averaging more than $107,000 (Berk and Fang Copyright © 2023. Health Administration Press. All rights reserved. 2017). Insurance addresses this problem. Suppose that one person in a hun- dred has the misfortune to run up $100,000 in healthcare bills and no one else spends anything. Consumers cannot predict whether they will be lucky or unlucky, so they may buy insurance. If a private firm offers insurance for an annual premium of $1,040, many consumers would gladly buy insurance to eliminate a 1 percent chance of a $100,000 bill. (The insurer gets $4,000 per 100 people to cover its selling costs, claims processing costs, and profits.) 3.2.2 Adverse Selection and Moral Hazard Alas, the world is more complex than the preceding scenario, and such a sim- ple plan probably would not work. To begin with, insurance tends to change CH03.indd Lee, 42 Economics for Healthcare Managers, Fifth Edition, Health Administration Press, 2023. ProQuest Ebook Central, Robert H.. 02/12/22 2:21 PM http://ebookcentral.proquest.com/lib/ucf/detail.action?docID=7179271. Created from ucf on 2025-01-28 20:57:54.  C h a p te r 3: An O ver v iew of the H ealthc are F inanc ing Sy stem 43 the purchasing decisions of consumers. Insured consumers are more likely to use healthcare services, and providers no longer feel compelled to limit their diagnosis and treatment recommendations to amounts that individual con- sumers can afford. The increase in spending that occurs as a result of insur- ance coverage is known as moral hazard. Moral hazard can be substantially moral hazard reduced if consumers face cost-sharing requirements; most contemporary The incentive to use additional plans have this provision. care that having Another less tractable problem remains. Some consumers, notably insurance creates. older people with chronic illnesses, are much more likely than average to face large bills. Such consumers would be especially eager to buy insurance. On the other hand, some consumers, especially younger people with healthy ancestors and no chronic illnesses, are much less likely than average to face large bills. Such consumers would not be especially eager to buy insurance. This situation illustrates adverse selection: people with high risk are apt to be eager to buy insurance, but people with low risk may not be. Wary of this phenomenon, insurance firms have tried to assess the risks that individual consumers pose and base their premiums on those risks, a process known as underwriting. Of course, underwriting drives up costs, making coverage underwriting more expensive, which further reduces the share of consumers who are will- The process of assessing the ing to pay for insurance. In the worst case, no private firm would be willing risks associated to offer insurance to the general public. with an insurance In the United States, three mechanisms reduce the effects of adverse policy and setting selection: employment-sponsored medical insurance, government-sponsored the premium accordingly. medical insurance, and health insurance subsidies. In 2020, 91 percent of the population had health insurance. About 34 percent had government- sponsored medical insurance, and 68 percent had employer-sponsored insur- ance (Keisler-Starkey and Bunch 2021). Ninety-four percent of Americans aged 65 and older have coverage through Medicare or Medicaid. Ninety percent of those younger than age 65 have coverage, with 63 percent having employer-sponsored coverage and 27 percent having government-sponsored coverage. (Ten percent of younger Americans bought their insurance them- Copyright © 2023. Health Administration Press. All rights reserved. selves, but for some, this will be in addition to other insurance). Why is the link between employment and medical insurance so strong? First, insurers are able to offer lower prices on employment-based insur- ance because they reduce sales costs and adverse selection risks by selling to groups. Selling a policy to a group of 1,000 people costs only a little more than selling a policy to an individual; thus, the sales cost is much lower. Since few people take jobs or stay in them only because of the medical insurance benefits, adverse selection rarely occurs (i.e., most employees get insurance, whether or not they think they will need it soon). Second, insurance also benefits employers. If coverage improves the health of employees or their dependents, workers will be more productive, thereby improving profits for CH03.indd Lee, 43 Economics for Healthcare Managers, Fifth Edition, Health Administration Press, 2023. ProQuest Ebook Central, Robert H.. 02/12/22 2:21 PM http://ebookcentral.proquest.com/lib/ucf/detail.action?docID=7179271. Created from ucf on 2025-01-28 20:57:54.  44 Ec o n o m ic s fo r H e a l th c a re M a n a g e r s Understanding Health Risks and Insurance Adverse selection is one reason for governments to intervene in health insurance markets. A persistent fear is that people with low risks will not buy insurance, pushing up premiums for people with higher risks. Once premiums go up, additional people with low risks will drop out. This sequence is called a “death spiral” because it ultimately results in no one buying insurance. To prevent this outcome, governments subsi- dize insurance or mandate that it be bought. There is little evidence that people understand health risks or insurance very well. Yet to make a good choice, consumers must com- pare many products with different attributes and forecast what their risks will be. Not surprisingly, many find insurance choices difficult. In fact, a recent survey of Americans who were considering seeking insurance through the ACA marketplace found that many struggled with such basic concepts as premiums, provider networks, and covered services (Kettlewell 2020). the company. Companies also benefit because workers with employment- based medical insurance are less likely to quit. The costs of hiring and training employees are high, so firms do not want to lose employees unnecessarily. Third, employers’ contributions to insurance premiums are excluded from their employees’ Social Security taxes, Medicare taxes, federal income taxes, and most state and local income taxes. Earning $5,000 in cash instead of a $5,000 medical insurance benefit could easily increase an employee’s tax bill by $2,500. This system is clearly advantageous from the perspective of insurers, Copyright © 2023. Health Administration Press. All rights reserved. employers, and employees. From the perspective of society as a whole, how- ever, its desirability is less clear. The subsidies built into the tax code tend to force tax rates higher, may encourage the use of insurance for costs such as eyeglasses and routine dental checkups, and give employees an unrealistic sense of how much insurance costs. 3.2.3 Medicare as an Example of Complexity The health insurance system in the United States is so complex that only specialists understand it. Exhibit 3.2 illustrates the complexity of healthcare financing by examining the flow of funds in traditional Medicare. Many Medicare beneficiaries pay for supplemental policies that cover deductibles, coinsurance, and other expenses that Medicare does not cover. Like many CH03.indd Lee, 44 Economics for Healthcare Managers, Fifth Edition, Health Administration Press, 2023. ProQuest Ebook Central, Robert H.. 02/12/22 2:21 PM http://ebookcentral.proquest.com/lib/ucf/detail.action?docID=7179271. Created from ucf on 2025-01-28 20:57:54.  C h a p te r 3: An O ver v iew of the H ealthc are F inanc ing Sy stem 45 insurers, Medicare requires beneficiaries to pay a deductible. In 2022, the Medicare Part A deductible was $1,556 per year and the Medicare Part B Medicare Part A deductible was $233. The most common coinsurance payments spring from Coverage for inpatient hospital, the 20 percent of allowed fees that Medicare beneficiaries must pay for most skilled nursing, Part B services. To keep exhibit 3.2 simple, we focus on supplemental policies hospice, and home that reimburse beneficiaries rather than pay providers directly. Beneficiaries health services. with these sorts of policies (and many without supplemental coverage) must Medicare Part B make required out-of-pocket payments directly to providers. Beneficiaries Coverage for outpatient services must also pay the Part B premiums that fund 25 percent of this Medicare and medical component. Like other taxpayers, beneficiaries must also pay income taxes equipment. that cover the other 75 percent of Part B costs. Employers and employees pay taxes to fund the Medicare system. The most visible of these taxes is the Medicare payroll tax, which is levied on wages to fund Part A (which covers hospital, home health, skilled nursing, and hospice services). In addition, corporation and individual income taxes help fund the 75 percent of Part B costs that premiums do not cover. The Centers for Medicare & Medicaid Services, the federal agency that operates Medicare, combines these tax and premium funds to pay providers. Not surprisingly, few taxpayers, beneficiaries, or public officials understand how Medicare is financed. EXHIBIT 3.2 The Flow Out-of-pocket payments of Funds in Medicare Medicare beneficiaries Providers Medicare payments Premiums Part B premiums Copyright © 2023. Health Administration Press. All rights reserved. Government and income taxes Supplemental insurers Payroll and Income taxes Employers Employees Wages CH03.indd Lee, 45 Economics for Healthcare Managers, Fifth Edition, Health Administration Press, 2023. ProQuest Ebook Central, Robert H.. 02/12/22 2:21 PM http://ebookcentral.proquest.com/lib/ucf/detail.action?docID=7179271. Created from ucf on 2025-01-28 20:57:54.  46 Ec o n o m ic s fo r H e a l th c a re M a n a g e r s fee-for-service 3.3 The Changing Nature of Health Insurance (FFS) An insurance Traditional, open-ended fee-for-service (FFS) plans (of which pre-1984 plan that pays providers on Medicare was a classic example) have three basic problems. First, they the basis of encourage providers and consumers to use covered services as long as the their charges for direct cost to consumers is less than the direct benefit. Because the actual cost services. of care is much greater than the amount that consumers pay, some consum- managed care ers may use services that are worth less than they actually cost. In addition, A loosely defined open-ended FFS plans discourage consumers from using services that are not term that includes all plans except covered, even highly effective ones. Finally, much of the system is unplanned, open-ended in that the prices paid by consumers and the prices received by providers do fee-for-service. not reflect actual provider costs or consumer valuations. It is sometimes Given the origins of traditional medical insurance, this inattention to used to describe the techniques efficiency makes sense. Medical insurance was started by providers, largely in that insurance response to consumers’ inability to afford expensive services and the unwill- companies employ. ingness of some consumers to pay their bills once services had been rendered. accountable care The goal was to cover the costs of services, not to provide care in the most organization efficient manner possible or to improve the health of the covered population. A network of Managed care is a varied collection of insurance plans with only one providers that have financial common denominator: they are different from FFS insurance plans. Tradi- incentives to tionally, FFS plans covered all services if they were included in the contract reduce spending and if a provider, typically a physician, was willing to certify that they were and improve outcomes. medically necessary. No FFS features tried to influence the decisions of patients or physicians (aside from the effects of subsidizing higher spending). global, risk- adjusted budget Payment of a fixed amount per person to the organization that is responsible Case 3.1 Oregon’s Coordinated Care for providing care Organizations to a population. Risk adjustment In 2012, Oregon launched an ambitious redesign of its Medicaid pro- Copyright © 2023. Health Administration Press. All rights reserved. means that the amount per person gram. It created a statewide network of coordinated care organiza- is higher for tions, which are similar in some respects to accountable care organi- people with higher zations, but coordinated care organizations have global, risk-adjusted risk of expensive budgets set by the state, are responsible for a broad range of services illnesses. (behavioral, dental, and physical), and are governed by a broad range community health of local stakeholders. These coordinated care organizations imple- workers Local, nonclinical mented a number of innovations: workers who help patients live Colocating behavioral health specialists in primary care healthier lives and Using community health workers help providers understand (continued) patients’ needs. CH03.indd Lee, 46 Economics for Healthcare Managers, Fifth Edition, Health Administration Press, 2023. ProQuest Ebook Central, Robert H.. 02/12/22 2:21 PM http://ebookcentral.proquest.com/lib/ucf/detail.action?docID=7179271. Created from ucf on 2025-01-28 20:57:54.  C h a p te r 3: An O ver v iew of the H ealthc are F inanc ing Sy stem 47 PPO (preferred provider Case 3.1 Using emergency department navigators to organization) (continued) connect patients with primary care A plan that contracts with Emphasizing identification and brief treatment a network of of patients with substance abuse disorders providers. (Network providers may Was this program successful? Per-member per-month spending for be chosen for a variety of reasons, hospital care decreased sharply, while spending on primary care but a willingness increased. Most of the quality measures with incentives attached to discount fees is improved; most without incentives did not. usually required.) Oregon recently launched a new initiative to improve the social HMO (health determinants of health for Medicaid beneficiaries (Kaye 2021). One of maintenance the first priorities was safe housing for recently discharged patients. organization) A plan that provides comprehensive Discussion Questions benefits to Why should a state provide Medicaid to its citizens? enrollees in exchange for Who is eligible for Medicaid in Oregon? a premium. How does this differ from eligibility in your state? (Originally, HMOs How is Oregon’s Medicaid program different from your health were distinct from other insurance insurance? From Medicare? firms because What type of insurance is Oregon Medicaid? providers were Why might community health workers improve outcomes and save not paid on a fee-for-service money? basis and because Why does Medicare not pay for community health workers? enrollees faced How might linking behavioral health and primary care improve no cost-sharing requirements.) outcomes and save money? point-of-service How might connecting patients with primary care improve outcomes (POS) plan and save money? A plan that allows Is there evidence that good primary care improves outcomes and members to see any physician saves money? Copyright © 2023. Health Administration Press. All rights reserved. but increases How might increasing treatment of substance abusers improve cost sharing for outcomes and save money? physicians outside the plan’s network. Is reducing the hospitalization rate a good thing? (This arrangement Is reducing the use of emergency departments a good thing? has become so common that POS Are social determinants important to health status? plans may not be labeled as such.) high-deductible At present, insurance takes five basic forms: FFS plans, PPOs (preferred plan provider organizations), HMOs (health maintenance organizations), A plan that has a point-of-service (POS) plans, and high-deductible plans. We will briefly deductible of at least $1,000 and describe each of the alternatives to FFS plans. may be combined PPOs are the most common form of managed care organization. All with a health PPOs negotiate discounts with a panel of hospitals, physicians, and other savings account. CH03.indd Lee, 47 Economics for Healthcare Managers, Fifth Edition, Health Administration Press, 2023. ProQuest Ebook Central, Robert H.. 02/12/22 2:21 PM http://ebookcentral.proquest.com/lib/ucf/detail.action?docID=7179271. Created from ucf on 2025-01-28 20:57:54.  48 Ec o n o m ic s fo r H e a l th c a re M a n a g e r s group model HMO providers, but their similarities end there. Some PPOs have small panels; oth- A plan that ers have large panels. Some PPOs require that care be approved by a primary contracts with a physician group to care physician; some do not. provide services. HMOs are more diverse than PPOs. Some HMOs are structured around staff model HMO large medical group practices and are called group model HMOs. Group model A plan that HMOs typically make a flat payment per consumer enrolled in the group. This employs staff practice is called capitation. Other HMOs, called staff model HMOs, employ physicians to physicians directly and pay them salaries. Both staff and group model HMOs still provide services. exist, but they are expensive to set up and make sense only for large numbers of capitation Payment per enrollees (because small HMOs cannot negotiate favorable prices with hospitals). person. (The The expansion of HMOs has been fueled largely by the growth of IPA payment does not (independent practice association) HMOs. These plans contract with large depend on the groups of physicians, small groups of physicians, and solo practice physicians. services provided.) These contracts assume many forms. Physicians may be paid per service (as IPA (independent PPOs usually operate) or per enrollee (as group model HMOs usually oper- practice association) HMO ate). IPAs also pay hospitals and other providers in varied ways. A plan that POS plans are another form of HMO. These plans are a combination contracts with of PPO and IPA plans. Unlike an IPA, they cover nonemergency services pro- independent practice vided by non-network providers, but copayments are higher. Unlike a PPO, associations, they pay some providers using methods other than discounted fee-for-service. which, in turn, Health insurance continues to evolve in a disorderly fashion. Where contract with this development will lead is not clear. The belief that managed care is in physician groups. retreat is widespread, and exhibit 3.3 seems to confirm this. From 2007 to EXHIBIT 3.3 Enrollment 70% Patterns in PPO 60% Employer- 60% Sponsored PPO Insurance 50% 48% Copyright © 2023. Health Administration Press. All rights reserved. 40% HD 29% 30% 20% HMO 24% HD 10% 8% FFS 1% 0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Data from Kaiser Family Foundation (2020). CH03.indd Lee, 48 Economics for Healthcare Managers, Fifth Edition, Health Administration Press, 2023. ProQuest Ebook Central, Robert H.. 02/12/22 2:21 PM http://ebookcentral.proquest.com/lib/ucf/detail.action?docID=7179271. Created from ucf on 2025-01-28 20:57:54.  C h a p te r 3: An O ver v iew of the H ealthc are F inanc ing Sy stem 49 2017, FFS plans all but disappeared, and the market share of PPO plans fell from 57 percent to 48 percent. HMO plans (which include POS plans in exhibit 3.4) fell from 34 percent of the employer-based market to 24 per- cent. High-deductible plans rose from 5 percent of the market in 2007 to 28 percent. The pattern in the employer-based market is quite different from that in other sectors. More than 60 percent of Medicare Advantage beneficiaries are in HMOs. Likewise, more than 70 percent of Medicaid beneficiaries are in HMOs, and about half of those buying ACA plans are as well. Complicating this already complex picture are recent changes in Medicare, Medicaid, ACA marketplace plans, and employment-based plans. These innovations could have widespread effects, although there is only pre- liminary evidence for most of them. We will explore these changes in detail in chapter 6. Case 3.2 Geisinger’s Transformation The conflicting incentives of FFS and capitation present significant problems for integrated health systems such as Geisinger Health System of central Pennsylvania. Indeed, after the collapse of its merger with Penn State Health, many were concerned about its viability. Geisinger faced losses in its hospi- tals and physician group, and its health plan was not doing well either low-value care (Goldsmith 2017). Care that has Geisinger’s turnaround involved two strategies: increasing the been scientifically share of physician compensation in the form of FFS payments and evaluated and implementation of a robust network of patient-centered medical found to be of little or no clinical homes to limit low-value care. The change in physician compensation value or to have allowed the creation of a broader network and rewarded higher vol- Copyright © 2023. Health Administration Press. All rights reserved. potential harms umes. In essence, Geisinger became a network HMO. greater than its Geisinger also had two major advantages. Its Medicare Advantage benefits. plan was very profitable, and its strong market position allowed it to network HMO A plan that offers a negotiate very good rates with local insurance plans. Those high rates variety of contracts gave it the resources it needed to transform its primary care practices with physician by turning them into patient-centered medical homes. groups, IPAs, In 2021, Geisinger Health Plan and Medacta, a Swiss orthopedics and individual physicians. A company, announced that they would offer a two-year guarantee for network HMO may total hip, knee, and shoulder replacement surgeries (Condon 2021). also own some of its hospitals and (continued) employ some of its physicians. CH03.indd Lee, 49 Economics for Healthcare Managers, Fifth Edition, Health Administration Press, 2023. ProQuest Ebook Central, Robert H.. 02/12/22 2:21 PM http://ebookcentral.proquest.com/lib/ucf/detail.action?docID=7179271. Created from ucf on 2025-01-28 20:57:54.  50 Ec o n o m ic s fo r H e a l th c a re M a n a g e r s Case 3.2 Discussion Questions (continued) Why would it make sense to become a network model HMO? Did it make sense for Geisinger to support the patient-centered medical home transition? Could an independent practice afford to become a patient-centered medical home? Why is Medicare sponsoring patient-centered medical home demonstrations? Why might private insurers support patient-centered medical homes? Do they? How would a six percent reduction in hospitalization rates affect hospitals? What is an example of low-value care? How is the Geisinger health plan faring now? How could Geisinger and Medacta offer a guarantee for joint replacement surgery? Would such a guarantee affect the decisions of you or a loved one? 3.4 Payment Systems In the past, most healthcare providers were paid based on volume. Today, insurers are experimenting with alternative payment models. These alter- native payment models can alter providers’ incentives, which, in turn, can change patterns of care. The power of changing incentives should not be underestimated, and managers need to be wary of getting what they pay for Copyright © 2023. Health Administration Press. All rights reserved. rather than getting what they want. In contracting with insurers or providers, managers need to recognize the strengths and weaknesses of different sys- tems. The four basic payment methods—salary, volume-based, value-based, and capitation—can be modified by the addition of incentive payments, increasing the number of possible payment methods. salary A salary is fixed compensation paid per defined period. As such, it is Fixed compensation not directly linked to output. Typically, physicians are paid a salary when their per period. productivity is difficult to measure (e.g., in the case of academic physicians) or when the incentives created by per-service payments are seen as undesir- able (e.g., an incentive to overtreat that increases costs). As noted earlier, most physicians in the United States have traditionally been paid on the basis of volume, meaning providing more services increases revenue. CH03.indd Lee, 50 Economics for Healthcare Managers, Fifth Edition, Health Administration Press, 2023. ProQuest Ebook Central, Robert H.. 02/12/22 2:21 PM http://ebookcentral.proquest.com/lib/ucf/detail.action?docID=7179271. Created from ucf on 2025-01-28 20:57:54.  C h a p te r 3: An O ver v iew of the H ealthc are F inanc ing Sy stem 51 Volume-based payments can take a number of forms. Per-service volume-based payments entail a payment for each separate service. For example, a phy- payment Payment that sician visit that involves 10 minutes talking to the doctor, an X-ray, and a increases as a laboratory test would result in a bill for three services. Case-based payments provider delivers make single payments for all covered services associated with an episode of more services. care. Medicare’s diagnosis-related group (DRG) system is a case-based per-service system for hospital care, although it does not include physicians’ services or payment Payment for each posthospital care. In essence, case-based payments are volume-based pay- billable service. ments for a bundle of services rather than separate payments for individual Providing an services. Value-based payments add a quality bonus or penalty to volume- additional service based payments. For example, Medicare reduces DRG payments to hospitals increases the bill. with above-average 30-day readmission rates for pneumonia patients. Finally, case-based payment capitation is compensation paid per beneficiary enrolled with a physician or A single payment an organization. Capitation is similar to a salary but varies according to the for an episode of number