Economics of Health Care
Objectives of the practical:
●
Define the concept of health care economics.
●
Describe three sources of health care financing.
●
Compare and contrast retrospective and prospective health care payment systems.
●
Analyze the issues and trends influencing health care economics and community
health services delivery.
●
Explain the causes and effects of health care rationing.
●
List the pros and cons of managed competition as opposed to a single-payer
system.
●
Explain the philosophical implications of health care financing patterns on
community health nursing’s mission and values.
Nurses concerned with the delivery of needed community health
services also must understand how those services are financed. In an era when
health care resources are limited and provider organizations are competing for
scarce dollars, it is essential for nurses to be knowledgeable about the issues
related to health care financing and about ways to obtain funding to address
identified health needs in the community. Behind the financing of health care
lies the science of health care economics. The field of economics, as a
whole, is a science that describes and analyzes the production, distribution, and
consumption of goods and services. It also is concerned with a variety of
related problems, such as finance, labor, and taxation. It studies and seeks to
promote the best use of scarce resources for the greatest good of society.
The
science of health care economics describes and analyzes the production,
distribution, and consumption of health care goods and services to maximize the
administration of scarce resources to benefit the most people. The goal of
health economics— similar in some ways to that of public health—is to promote
the greatest good for the greatest number using available resources and
knowledge.
This
chapter summarizes the changing picture of health care economics and its
financial incentives and disincentives for enhancing the public’s health. More
extensive treatment of these subjects is found in the Selected Readings
section.
ECONOMIC THEORIES AND CONCEPTS
Health economics can be better understood by examining
the two basic theories underlying the science of economics. The first is
microeconomics, and the second is macroeconomics. In addition, concepts of
health care payment are discussed.
Microeconomics
Microeconomic
theory is concerned with supply and demand. Economists using
microeconomic theory study the supply of goods and services as these relate to
consumer income allocation and distribution. They further study how this allocation
and distribution affects consumer demand for these goods and services. Supply
and demand influence each other and, in turn, affect prices. An increase in or
oversupply of certain products leads to less overall consumption (decreased demand)
and lowered prices. The opposite also is true. Limited availability of desired
products means that supply does not meet demand, and prices increase.
Microeconomic theory is useful for understanding price determination, resource
allocation, consumer income, and spending distribution at the level of
individuals and organizations.
Macroeconomics
Macroeconomic theory is concerned
with the broad variables that affect the status of the total economy.
Economists using macroeconomics study factors influencing employment, income,
prices, and economic growth rates. Their focus is on the larger view of
economic stability and growth. Macroeconomic theory is useful for providing a
global or aggregate perspective of the variables affecting the total economic picture.
The economics of health care encompasses both
microeconomics and macroeconomics, examining an intricate and complex set of
interacting variables. It is concerned with supply and demand: Is the supply of
available resources sufficient to meet the demand for use by consumers? It
examines costs and benefits, cost-effectiveness, and cost efficiency: Are the
resources expended achieving the desired outcomes? It studies the allocation of
scarce resources for health care: Where should resources, such as funding for
health programs and services for at-risk populations, be applied when there are
insufficient resources to address all of the needs? Health economics is a major
field of study in and of itself. Health economists draw on economic theory to
study and develop an understanding of the factors influencing the financing and
delivery of health services. Macroeconomic theory has been useful in providing
a large-scale perspective on health care financing that has resulted in various
proposals for national health plans, health care rationing, competition, and
managed care. These concepts are described later in the chapter. Microeconomic
theory may prove more useful if health care competition increases, because the
success of the supply-and-demand concept depends on a competitive market. The
pros and cons of competition also are examined later in this chapter. Issues
such as cost containment, competition between providers, accessibility of
services, quality, and need for accountability continue to be targets of major
concern in the 21st century.
Payment
Concepts in Health Care
Reimbursement for health care services generally has been
accomplished through one of two approaches: retrospective or prospective
payment. Conceptually, these approaches are opposite each other. It is helpful
to understand their differences and their meaning for the financing and
delivery of health services, past and present.
Retrospective Payment
A traditional form of reimbursement for any kind of
service, including health care, is retrospective payment, which means to
reimburse for a service after it has been rendered. A fee may be established in
advance. However, payment of that fee occurs after the fact, or
retrospectively. This is known as the fee-for-service (FFS) approach. In health
care, limited accountability in the use of retrospective payment has created
several problems. With thirdparty payers serving as
intermediaries, neither consumers nor providers of health services were
accountable for containing costs. Patients and providers alike often insisted
on expensive or unnecessary tests and treatments. Because reimbursement was
made retrospectively by the insuring agency, there was no incentive to keep a
lid on this spending.
Third-party reimbursement increased, along with rising physician
fees, to create an inflationary spiral of escalating costs. Abuse of the FFS
system made it more difficult to develop retrospective payment for other health
care providers, including nurses. A further problem associated with the FFS
concept was its tendency to encourage sickness care rather than wellness services.
Physicians and other providers were rewarded financially for treating illness.
There were few incentives for prevention or health promotion in an industry
that reaped its revenues from keeping hospital beds full and caring for the sick
and injured. Although retrospective payment worked well in other industries,
from a cost containment as well as a public health
perspective, it was problematic in health care.
Prospective Payment
Prospective reimbursement, although not a new concept,
was implemented for inpatient Medicare services in
1. An external authority is empowered (by statute, market
power, or voluntary compliance by providers) to set provider charges,
third-party payment rates, or both.
2. Rates are set in advance of the prospective year
during which they will apply and are considered fixed for the year (except for
major, uncontrollable occurrences).
3. Patients, third-party payers, or both pay the
prospective rates rather than the costs incurred by providers during the year
(or charges adjusted to cover these costs).
4. Providers are at risk for losses or surpluses.
The
concept of prepayment, or consumers paying in advance of health care, has
existed for many years. As far back as 1933, prepaid medical groups were
advocated to reduce costs and make services more accessible (Hyman, 1982). This
pattern of prepayment for comprehensive services has since continued in a
variety of forms. Examples of early plans were the Health Insurance
Program of Greater New York City and the Kaiser Plan. The success of these two plans
helped to influence the growth of the health maintenance organization (HMO), a
type of managed care discussed later in this chapter.
Prospective
payment imposes constraints on spending and gives incentives for cutting costs.
The Federal government therefore enacted a prospective payment plan (Social
Security Amendments Act) in 1983. The plan, called diagnosis-related groups (DRGs), is a billing classification system based on 23 major
diagnostic categories and 467 DRGs that provides
fixed Medicare reimbursement to hospitals. This system was enacted to curb
Medicare spending in hospitals and to extend the program’s solvency period. The
regulatory approach of DRGs changed Medicare hospital
reimbursement from a cost-based retrospective payment system, in which a
hospital was paid its costs, to a fixed-price prospective payment system. It
was designed to create incentives for hospitals to be efficient in the delivery
of services.
Indeed, the prospective payment system has
reduced Medicare’s rate of increase in inpatient hospital spending and
increased hospital productivity (Conger, 1999). It also has reduced hospital
stays and unnecessary admissions and created a boom in home health care (D’Angelo & D’Angelo, 1999). A
spinoff, however, was fierce competition among providers
and mounting concern about quality of care—in hospitals, ambulatory settings,
and home care.
The
prospective payment concept also has proved useful from a public health
perspective. Prepaid services create incentives for providers to keep their
enrollees healthy, thus reducing provider costs. A potential, indirect benefit from
fixed rates and reduced costs is that more of the health care dollar is
available for spending on prevention programs. Further understanding of health
economics and its impact on community health and community health nursing can be
obtained by examining methods of health care financing, issues and trends
influencing health care economics, and the effects of financing patterns on
community health practice.
SOURCES OF HEALTH CARE FINANCING:
PUBLIC AND PRIVATE
Financing of health care significantly affects community health
and community health nursing practice. It influences the type and quality of
services offered as well as the ways in which those services are used. Sources
of payment may be clustered into three categories: third-party payments, direct
consumer payment, and private or philanthropic support.
Third-Party Payments
Third-party payments are monetary
reimbursements made to providers of health care by someone other than the
consumer who received the care. The organizations that administer these funds
are called third-party payers because they are a third party, or external, to
the consumer-provider relationship. Included in this category are four types of
payment sources: private insurance companies, independent health plans,
government health programs, and claims payment agents (Harrington & Estes,
2001).
Private Insurance Companies
Private insurance companies market and underwrite
policies aimed at decreasing consumer risk of economic loss because of a need
to use health services. No private insurer directly delivers health services,
although some, such as John Hancock, have a history of subsidiary proprietary
home health agencies. Private health insurers have been experiencing
decelerating growth for more than a decade as the result of a shift by
employees to lower-cost managed-care plans offered through the workplace. Even
with this change, in bad economic times companies downsize and lay off workers
and many people “feel they are only a pink slip away from being uninsured”
(Brink, 2002, p. 63) (see What Do You Think? I). There are three types of
private insurers. First are commercial stock companies that sell health
insurance, usually as a sideline. They are private, stockholder-owned corporations
that sell insurance nationally; examples are
Independent Health Plans
Independent or self-insured health plans underwrite the
remaining private health insurance in the
Government Health Programs
Government health programs make up the largest source of third-party
reimbursement in the
Medicare
Medicare,
known as Title XVIII of the Social Security Act Amendments of 1965, has
provided mandatory federal health insurance since July 1, 1966, for adults age
65 years and older who have paid into the Social Security system and for
certain disabled persons. Medicare is the largest health insurer in the
Medicare
is administered by the Health Care Financing Administration (HCFA) of the U. S.
Department of Health and Human Services. Part A of
Medicare, the hospital insurance program, covers inpatient hospitals,
limited-skilled nursing facilities, and home health and hospice services to
participants eligible for Social Security. It is financed through trust funds
derived from employment payroll taxes. Part B, the supplementary and voluntary
medical insurance program, primarily covers physician services but also covers home
health care for beneficiaries not covered under part A. It is funded through
enrollee monthly premiums (about 25%) and a tax-supported federal subsidy
(about 75%).
Medicare was managed in the same manner for
more than 30 years until August 1997, when President Clinton signed the
Balanced Budget Act (Pub L No. 105–33). This act, which took effect in 1998,
provided Medicare beneficiaries with markedly different options. In addition,
the National Bipartisan Commission on the Future of Medicare was established by
Congress in 1997 to consider options to preserve the fiscal integrity of the
program while sustaining health coverage for an aging “baby boom” generation.
One of the plans being considered by this committee is an increase in the
eligibility age for Medicare, from 65 to 67 years, over a 24-year span that
would coincide with the increasing age requirements for full Social Security
benefits beginning to take effect. This could save $620 billion over 30 years
and would affect the entire baby boom generation. Decisions on this plan have
not been made. Financing Medicare benefits into the future
while maintaining or improving coverage for elderly and disabled beneficiaries
remains the major challenge facing the program (Firshein,
1999). Among the most significant alterations brought about by the
Balanced Budget Act are those to the fast-growing managed-care side of
Medicare, which in 2002 covered about 30% of enrollees. To control Medicare
costs while expanding the range of available health care options, beneficiaries
are offered a relativity new program called Medicare Plus
Choice Plans. This program seeks to accelerate the migration of patients away
from Medicare’s traditional and more expensive FFS program into various managed
care options. Enrollees opting to remain in traditional Medicare will continue to
be covered by the traditional FFS program, which gives patients unlimited
choice of doctors, hospitals, and other providers. Those moving to the Medicare
Plus Choice plans have a limited choice of providers
but, in return, will be offered options such as joining coordinated care plans,
including HMOs, preferred provider organizations (PPOs),
provider-sponsored organizations, private FFS plans, and on a limited basis, medical
savings account plans. With this new law, Medicare has changed from an FFS,
when-you-are-sick program to a preventive and wellness program (U.S. Department
of Health and Human Services, 2002).
Although
Medicare attempts to meet a need among the elderly in the
When
Medicare began, there were five workers for each Medicare beneficiary.
Projections for the year 2040 indicate that there will be fewer than 2 workers
for each beneficiary.
Medicaid
Medicaid,
known as Title XIX of the Social Security Act Amendments
of 1965, provides medical assistance for children; for those who are aged,
blind, or disabled; and for people who are eligible to receive federally
assisted income 
maintence
payments (www.cms.gov, 2002). It is jointly funded between federal and state
governments to assist the states in the provision of adequate medical care to
these eligible needy persons. The states have some discretion in determining which
groups their Medicaid programs will cover and the financial criteria for
Medicaid eligibility. To be eligible for federal funds, however, states are
required to provide Medicaid coverage for most individuals who receive federally
assisted income maintenance payments, as well as for related groups not
receiving cash payments. The states determine the type, amount, duration, and
scope of services. The following are examples of mandatory Medicaid eligibility
groups:
•
Recipients of federally assisted income maintence,
including Supplemental Security Income recipients
•
Infants born to Medicaid-eligible pregnant women
•
Children younger than 6 years of age and pregnant women who meet the state’s
assisted income maintence requirements or whose
family income is at or below 133% of the federal poverty level
•
Recipients of adoption assistance and foster care under title IV-E of the
Social Security Act
•
Certain Medicare beneficiaries (qualified disabled workers and certain poor
Medicare recipients)
•
Special protected groups who lose cash assistance because of the cash programs’
rules
Coverage
includes preventive, acute, and long-term care services. Potential Medicaid
recipients must apply for coverage and prove their eligibility in terms of
category and limited income. In 2002, 36 million low-income Americans were
enrolled in Medicaid (www.cms.gov, 2002). This is 5 million citizens lower than
in the mid-1990s. Many Americans were affected by dramatic changes in the scope
and limits of federally supported income maintence
programs and no longer meet the financial requirements for the Medicaid
program. As with Medicare, Medicaid programs moved to a managed care concept,
following mandates within the Balanced Budget Act of 1997. The move has not
been without its problems for those receiving Medicaid. Medicaid beneficiaries
are economically disadvantaged, frequently reside in medically underserved areas,
and often have more complex health and social needs than do Americans with
higher incomes. Early evidence on the implementation of Medicaid managed care
showed some improvement in access to a regular provider but more difficulties in
obtaining care and dissatisfaction with care compared with those in Medicaid
FFS. In recent years, many people who were never before eligible for Medicaid
benefits have become eligible due to downward national economic trends, company
downsizing, and corporate scandals. Subsequently, families have lost the health
care benefits that were employer subsidized and now find themselves among those
eligible for Medicaid managed care programs. Medicaid’s use of managed care has
grown dramatically. The percentage of Medicaid recipients enrolled in a broad
array of managed care arrangements increased from 10% in 1991 to 37% in 1996
and is projected to continue to increase. The future success of Medicaid
managed care depends on the adequacy of the capitation rates (fixed amounts
of money paid per person by the health plan to the provider for covered
services) and the ability of state and federal governments to monitor access
and quality. Quality performance standards are evolving, and ensuring access
and quality of care in a managed care environment will require fiscally solvent
plans, established provider networks, education of providers and beneficiaries
about managed care, and awareness of the unique needs of the Medicaid
population.
The
success of managed care programs depends on adequate financial support through
enrollee premiums, a focus on wellness and prevention, and corporate
solvency enhanced by good management practices, moderate enrollee usage, and a
stable economic environment.
Other Government Programs
A federal health insurance program known as the
Consolidated Omnibus Budget Reconciliation Act, which was developed in 1985 and
designated to be self-financing, protects unemployed workers who have lost
their benefits. Another workers’ compensation program is state administered and
requires employers to pay health care costs of workers who sustain illness or
injury associated with their jobs. In addition to third-party reimbursement,
the government offers some direct health services to selected populations,
including Native Americans, military personnel, veterans, merchant marines, and
federal employees.
Claims Payment Agents
Claims payment agents administer the claims payment process
of government third-party payments. That is, the government contracts with
private agents to handle the claims payment process. More than 80% of the
government’s third-party payments have been handled by these private contractors,
who sometimes are known as fiscal intermediaries (when processing Medicare
hospital claims), carriers (when dealing with insurance under Medicare), or
fiscal agents (as applied to Medicaid programs). As an example, Blue Cross, in
addition to being a private insurance company, also is a claims payment agent
for Medicare.
Direct Consumer Reimbursement
A second major source of health care financing comes from
direct fees paid by consumers. This refers to individual out-of-pocket payments
made for several different reasons. One is payments made by individuals who
have no insurance coverage so that fees must be paid directly for health and
medical services. Another is payments for limited coverage and exclusions
(services for which the consumer must bear the entire expense). For example,
many individuals carry only major medical insurance and must pay directly for
physician office visits, prescriptions, eye glasses, and dental care. In other
instances, the insurance contract may include a deductible amount that must be
paid by the insuree before reimbursement begins (eg, the first day of hospital care under Medicare must be
paid by the patient—$876 per benefit period in 2004). The contract may be
established on a copayment basis, which determines a
percentage to be paid by the insurer and the rest by the individual. Or, the
individual may pay the remainder of a health service bill after the insurer has
paid a previously agreed-on fixed amount, such as a fixed coverage for labor
and delivery. Direct consumer payment has accounted for approximately one third
of total personal health care expenditures in the
Private Support
Private or philanthropic support, a third source,
contributes both directly and indirectly to health care financing. Many private
agencies fund programs, underwrite research, and provide benefits for people
who otherwise would go without services. In addition, volunteerism, the efforts
of numerous individuals and organizations who donate their time and services, provides
tremendous cost savings to health care institutions. It also enables many
individuals to receive services, such as home-delivered meals or transportation
to health care facilities, at no charge. Philanthropic financing of health care
has significantly decreased in the last two decades. However, continued private
support is essential, particularly when federal and state monies for health and
social programs have been severely restricted (Harrington & Estes, 2001).
TRENDS AND ISSUES INFLUENCING HEALTH CARE ECONOMICS
Cost Control
Control of rapidly rising costs has been one of the
largest driving forces behind health care reform in the 1980s and 1990s.
Despite a variety of cost-control strategies tried by public- and
private-sector payers, health care costs have continued to rise. In 2000,
health care costs rose 7.2%, the biggest jump in a decade, and employer-based
health premiums were expected to rise 13% to 16% in 2002, the largest increase
since 1990 (Hellander, 2002). Health expenditures in
1980 accounted for 9.1% of the gross national product (GNP), which is
the total value of all goods and services produced in the
Many groups are underserved; prescription
medication coverage is not common in health care plans and is coming into the
Medicare program in a limited way in 2006; and the poorest of the poor gain in
numbers and go without any health care coverage (see Bridging Financial Gaps). Health
care costs in the
A focus on primary prevention demands a paradigm shift in
thinking about the practice and delivery of health care. It is one that fits
more closely with the mission of public health. It expects that citizens are
involved in their health care, are knowledgeable about their health status,
manage self-care practices, and modify lifestyle behaviors to promote wellness.
This creates a rich environment for community health nurses to work in
collaboration with primary care practitioners and other health care
professionals to keep the cost of health care under control while providing
quality care focusing on primary prevention.
Cost sharing is a
cost-containment strategy in which consumers pay a portion of health care
costs. Insurance deductibles of $100 to $500 per person per year are typical,
as are coinsurance rates of 20% per service. Cost sharing has successfully
reduced utilization of health services without having negative health effects.
Utilization review techniques have further enhanced utilization and cost
control. However, when considering coverage for low-income and some elderly persons,
cost sharing appears to have limited usefulness (Sultz
& Young, 2001).
Global Cost Control
Internationally, health care expenditures also are of
concern. Health care costs consumed a greater percentage of the Unites States’
GNP than that of most of the 15 countries in the Organization for Economic
Cooperation and Development (OECD) between 1980 to 1997.
Health care expenditures remained the same over those 17 years in
Access
to Health Services: The Uninsured and Underinsured
A growing segment of the
Medicare
Plus Choice Plans, created in 1997, were intended to
increase beneficiary participation in HMOs and other private plans. The
Medicaid program, too, depends on managed care to deliver services to the 36
million Americans enrolled in 2001. Tight budget constraints on Medicaid
operations have resulted in provider payment rates that often are substantially
below market rates, contributing to access problems. Capitation rates need to
be sufficient to ensure that plans are able to care for Medicaid enrollees. The
future success of Medicaid managed care depends on the adequacy of the
capitation rates and the ability of state and federal governments to monitor access and
quality.
Managed
Care
The term managed care became popular in the late
1980s and early 1990s. It refers to systems that coordinate medical care for
specific groups to promote provider efficiency and control costs. Although the
term is relatively new, the concept has been practiced for many years through a
variety of models of alternative health care delivery. It is a cost-control strategy
used in both public and private sectors of health care. Care is “managed” by
regulating the use of services and levels of provider payment. This approach
includes the use of HMOs and PPOs. In contrast to FFS
models, managed care plans operate on a prospective payment basis and control
costs by managing utilization and provider payments. The managed care model
encourages the provision of services within fixed budgets, thus avoiding cost
escalation. However, if a system rewards increased FFS billings, managed care
can provide only a partial solution to controlling utilization. These are
issues that various managed care organizations (MCOs)
are trying to eliminate.
Health Maintenance Organizations
A health maintenance organization (HMO) is a
system in which participants prepay a fixed monthly premium to receive comprehensive
health services delivered by a defined network of providers to plan
participants. The HMOs are the oldest model of coordinated or managed care.
Several HMOs have existed for decades, but many have developed recently.
Enrollees benefit from lower costs, less cost-sharing, and minimal billing paperwork. From 1930 to
1965, the HMO movement, supported initially by the private sector, gradually
gained federal backing. Group plans were included as a part of Medicare and
Medicaid legislation as well as the Partnership for Health Act. The HMO Act of
1973 demonstrated stronger federal support. Amendments to this act in 1976
lifted restrictions and further encouraged HMO growth. Currently, there are
numerous HMOs with much internal diversity in the industry. However, HMOs
continue to claim unique properties (Harrington & Estes, 2001):
• There is a contract between the HMO and the
beneficiaries (or their representative), the enrolled population.
• The HMO absorbs prospective risk.
• A regular (usually monthly) premium to cover specified (typically
comprehensive) benefits is paid by each enrollee of the HMO; few additional
charges are levied, because the payment mechanism is not FFS.
• HMOs have an integrated delivery system with provider incentives
for efficiency. The HMO contracts with professional providers to deliver the
services due the enrollees; the basis for reimbursing those providers varies among
HMOs.
Official encouragement, government subsidies, and the pressures
for cost control spurred the growth of HMOs. Some HMOs follow the traditional
model, employing health professionals (eg,
physicians, nurses), building their own hospital and clinic facilities, and
serving only their own enrollees.
Other
HMOs provide some services while contracting for the rest. Variations of the
HMO model include solo practice physicians (some also continuing FFS medicine) who
affiliate with hospitals. Americans enrolled in HMOs— whether through
government programs (eg, Medicare), employer- based
programs, or private insurers—number more than 130 million people. The HMOs
have been viewed as a positive alternative delivery system because of their
potential for conserving costs, which results from their emphasis on
prevention, health promotion, and ambulatory care, with a concomitant reduction
in hospital and medical care utilization. However, there are questions as to
whether the cost savings might result partly from favorable selection of
enrollees. Quality concerns also have been raised about the danger of underserving enrollees to stay within payment limits (Sultz & Young, 2001). Nevertheless, since the expanding
years of HMOs in the early 1990s, many individuls
have chosen a managed care plan.
The American
Public Health Association has significant concerns about the ongoing changes
in the organization
and financing of medical care and health services and the impact of these
changes on public
health. While managed care arrangements hold the promise of providing
affordable, quality
health care for our nation, reports of financial considerations taking
precedence over
patients’ health deserve attention. Specific issues of concern include
denials of
necessary care, underfunding of public health and
prevention services, lack of
accountability, loss of choice of health care provider, inadequate access to
care (especially
specialists), lack of
comparable and consumerfriendly information and data
about health plans,
and abuses in
marketing (American Public Health Association, 1998a).
These
concerns have not gone unattended. The Health Insurance Portability and
Accountability Act of 1996 and the Newborns’ and Mothers’ Health Protection Act
of 1996 were passed by the 104th Congress of the
Furthermore,
in 1998, Congress considered the Patients’ Bill of Rights, modeled after
recommendations from the Advisory Commission on Consumer Protection and
Quality, which stipulated that managed care plans (APHA, 1998a):
•
Provide emergency services
• Are
legally liable for medical malpractice
• May
not use “gag” clauses in provider contracts
•
Offer sufficient access to specialists, including direct access to specialists
for ongoing treatment and obstetricians-gynecologists for women
•
Offer an external, accessible, independent appeals process for service denials
• May
not retaliate against “whistle blowers”
• May
not offer financial incentives to providers to discourage service utilization
by patients
•
Incorporate quality assurance programs
•
Reimburse for approved clinical trials
APHA
policy supports all of these reforms as they address, at the federal level,
some of the problems occurring in the HMO plans during the years of significant
growth.
Preferred Provider
Organizations
A preferred provider organization (PPO) is another
model of managed or coordinated care that developed earlier than the HMO. A PPO
is a network of physicians, hospitals, and other health-related services that contracts with a third-party payer organization to
provide comprehensive health services to subscribers on a fixed FFS basis.
Because of contractual fixed costs, employing organizations who subscribe can
offer medical services to their employees at discounted rates. In PPOs, consumer choice exists. Enrollees have a choice among
providers within the plan and contracted providers out of the plan. The PPOs practice utilization review and use formal standards
for selecting providers.
Enrollment
in PPOs grew from about 10 plans in 1981 to more than
700 plans in the 1990s. The number of people enrolled in PPOs
also increased, from an estimated 10.4% of individuals with private insurance
in 1988 to 40% by the late
1990s, with the numbers leveling off as the decade came to a
close. Early use of PPOs appeared to promote cost
savings, but the long-range cost effectiveness of this model has yet to be
proved, especially with the expansion of HMOs. Other variations on managed care
models continue to appear. One is the point-of-service network, which combines HMO
cost containment with PPO freedom to choose providers. Enrollees may use their
HMO’s physicians or may select outside physicians by paying a higher
coinsurance charge. Issues of cost, quality, extent of coverage, and freedom to
choose providers remain dominant in discussions of the managed care concept.
Health
Care Rationing
The concept of rationing in health care refers to
limiting the provision of adequate health services to save costs, but in so doing
jeopardizing the well-being of some groups of people. Rationing implies that
resources are limited and therefore must be used sparingly. Its effect is to
restrict people’s choices and deny access to beneficial services. Although some
consumer choice is involved, mostly it is the providers and insurers of health
services who are unilaterally making rationing decisions to contain costs. When
rationing occurs, there always is the danger of compromising what is acceptable
to consumers and the quality of services that they receive.
Rationing
in health care has been practiced for many years. With limited resources for
health services delivery, government programs have had to establish strict
eligibility levels and monitor the use of these resources sparingly to ensure their
most equitable distribution. Private insurers, to maintain organizational
viability and some kind of profit margin, have engaged in rationing to exclude
enrollees who are at greatest risk for health problems (Sultz
& Young, 2001) (see Bridging Financial Gaps). Advances in
knowledge and technical capabilities through research and technology compound
rationing decisions. When several individuals need an organ transplant
and only one organ is available, what criteria should be used to select the
recipient? Now that it is known that certain lifestyle behaviors, such as smoking
or driving without restraints, create health risks, should people who engage in
these activities pay a higher price for health care or be excluded from certain
services? Should a younger person needing specialized surgery take priority
over an elderly person needing similar care? There are no easy answers.
Providers and insurers have struggled with these difficult policy issues for
years. In today’s health economics, the problems are even more complex.
Competition
and Regulation
Competition and regulation in health economics often have
been viewed as antagonistic and incompatible concepts. Competition means
a contest between rival health care organizations for resources and clients. Regulation
refers to mandated procedures and practices affecting health services
delivery that are enforced by law. In a society where freedom
of choice and individualism have long been valued, competition provides opportunities
for entrepreneurism, free enterprise, and scientific advancement.
Yet to promote the public good, oversee equitable distribution of health
services, and foster communitywide participation, regulation also serves an
important role.
Health
care incorporates four major kinds of regulation: (1) laws, (2) regulations,
(3) programs, and (4) policies (Sultz & Young,
2001). Laws that regulate health care include any legislation that governs
financing or delivery of health services, such as legislation regulating
Medicare reimbursement to hospitals. Regulations guide and clarify
implementation; they are issued under the authority of law and are part of most
federal health care programs. Examples include regulations governing project
grants such as HMO development, formula grants such as Hill-Burton, and
entitlements such as Medicare and Medicaid (Jacobs & Rapoport,
2002). Regulatory programs are created from free-standing legislative
enactments and are designed to accomplish specific goals, such as accreditation
and licensing rules for hospitals, public health agencies, and other health
service providers. Regulatory policies have a broader focus and involve
decisions that shape the health care system by channeling the flow of resources
into it and setting limits on key players’ actions. Examples of regulatory policies
are found by reviewing state or federal budget proposals for funding programs
such as health manpower training, research, and technology development.
From
the 1950s through the 1970s, the federal government assumed a strong role in
the regulation of health services. First, federal subsidy of health care costs
increased, and there was greater federal control of state programs. Health
services became regionalized and more comprehensive. Federal appropriations
supported operational as well as capital and planning costs. There was greater
federal support for health research and the training of health professionals. Group
medical practice multiplied as a cost-saving measure. More than 60% of the
population was covered by some form of prepaid health insurance, largely
because of the effects of Medicare and Medicaid. There was an increase in
interagency health planning cooperation and improved health program evaluation.
Neighborhood health centers, community mental health centers, and other
programs were developed to improve health care access for everyone. Although
costs were rising, it was a period of relative economic stability that emphasized
quality of care. During this period, the federal government assumed a major
role, regulating the planning, use, and reimbursement of health care services. In
the early 1980s, the passage of the Omnibus Budget Reconciliation Act caused
dramatic changes affecting health care. The federal government, having failed
to contain rising health care costs, shifted responsibility for the public’s
health and welfare back to state and local governments. Large amounts of
federal funding for health research, health manpower training, and public
health programs were withdrawn. Continued escalation of health care costs
prompted a concentrated effort among public and private providers alike to find
cost-containment measures. From all this grew the competition-versus-regulation
debate. Competition, its proponents say, offers wider consumer choice and
positive incentives for cost containment and enhanced efficiency (Sultz & Young, 2001); that is, consumers are free to
select among various health plans on the basis of cost, quality, and range of
services. Competing providers must develop efficient production and
distribution methods to stay in business, and consumers, because of the
required cost sharing that is part of the competition model, are
more likely to use only necessary services. Examples of competition are
increasingly evident as more health plans, including HMOs and PPOs, vie with insurance companies for subscribers (see
What Do You Think? II). Many hospitals, too, compete aggressively for patients.
For example, some hospitals now promote their services with advertisements
depicting a new mother and father having a candlelight dinner in the hospital
with their newborn infant in the bassinet beside them, or surgical centers
promote the “hotel guest” concept with dramatically appointed rooms including
meals and lodging for a guest. Although it appears that competition offers the
best service for the least cost, regulation advocates have for almost 20 years
argued that there are at least four problems associated with the competition
model: (1) consumers often do not make proper health care choices because of
limited knowledge of health services; (2) competition may discriminate against
enrolling certain consumers, especially high-risk, high-cost patients, thus
excluding those who may need services the most; (3) the competition model may
not encourage enough teaching and research—expensive elements of our present
system; and (4) quality may be sacrificed to keep costs down. Regulation
advocates conclude that standardization and controls are needed to guarantee
quality and equal access. Leaders in the field have concluded that both
competition and regulation are needed (APHA, 1998b; Sultz
& Young, 2001; Kongstvedt, 2002). With foresight,
McNerney wrote in 1980, “It is rapidly becoming
apparent that what we need is a proper balance between competition and
regulation with more effective links [and] regulation [should be] used as a
force to keep the market honest” (p. 1091).
EFFECTS OF HEALTH ECONOMICS
ON COMMUNITY HEALTH PRACTICE
Health economics has significantly affected community health
and community health practice by advancing (1) disincentives for efficient use
of resources, (2) incentives for illness care, and (3) conflict with public
health values.
Disincentives for Efficient Use of Resources
All of the system structures that directly or indirectly
promote cost escalation and prevent cost containment contribute to
disincentives for efficient use of resources. For example, retrospective
financial reimbursement, with its lack of setting limits, encourages spending
on nonessential tests and treatments and drives up costs. Tax-deductible
employer contributions for health care coverage and nontaxable employee health
benefits encourage unnecessary use of services and drive up costs. Lack of cost
sharing by consumers and no financial risk for decisions made by providers
create further disincentives to keep costs down.
Community health has been affected in several ways. Abuse
of resources in some parts of the system means a depletion
in other areas. Community and public health programs recently have experienced
diminished federal and state allocations and severe budget cuts affecting even
basic community health services. Competition from the private sector in home
care and other community services, such as health education programs, has
forced traditional public health agencies to reexamine their programs and seek
new avenues for service and new revenue sources. Costs indirectly affect even
appropriate use of nursing personnel in community health. Failing to recognize
the differences in skills of community health nurses and less-prepared
personnel, proliferating agencies in community health often have hired persons
who are underqualified to give the needed high-caliber
and comprehensive care. Finally, the advent of prospective
payment and limits on lengths of stay have encouraged early hospital
discharge, resulting in more acutely ill people needing home care services. The
immediate effect has been an increase in the demand for highly skilled and more
expensive home care services, which requires changes in provision patterns of
community health care. The longrange effects of this
phenomenon on family stress and caregiver health, on community health care
reimbursement, and on the nature and structure of community health services,
including the role of the community health nurse, have yet to be determined.
Incentives for Illness Care
The traditional American health care system inadvertently
tends to promote illness because health care providers have primarily been
rewarded for treating problems, not for preventing them. Hospitals have had
more income when their beds stayed full of sick or injured people. The bulk of
most reimbursable health services has centered on treating illness or
disability in hospitals, nursing homes, and ambulatory care facilities, using
physicians or skilled nursing care in the home—situations in which the
individual must play the role of patient. Health promotional nursing activities
such as comprehensive prenatal, maternal, and infant care; health education; childhood
immunizations; and home services to enable the elderly to live independently
have not been covered by most insurers.
A
system that financially supports illness care affects community health practice
in several ways. The number and severity of health problems in a community
increase when individuals postpone care because they cannot afford visits to
the doctor or clinic. It has been more difficult to encourage community clients
to assume responsibility for their own health and to engage in self-care and
prevention. Furthermore, such illness-oriented incentives create a basic
societal valuing of illness care that, conversely, devalues wellness care.
Health promotion and disease prevention efforts become second-ranked priorities
in the competition for scarce resources. In communities where a greater
proportion of community health practice is spent on treatment of disorders and
rehabilitation, resources are limited for prevention and health promotion.
Prepayment methods and the growth of managed care have been positive moves in
the direction of a more wellness-oriented financial incentive structure. An HMO
has the incentive to offer preventive and healthpromoting
services such as early detection and treatment of symptoms, regular physical
examinations, and health teaching. Health care reform proposals show promise of
greater recognition of the cost-saving value of prevention efforts. Managed
care has evolved but remains a “system of business strategies employed to make
health care services efficient and cost-effective” with the “highest priority
to market principles” (Drevdahl, 2002, p. 163). This
makes individual rights significant, whereas societal obligations are pushed to
the background. “Freedom of choice and action take precedence
over issues of equality and equity” (p. 163).
The MCOs have business-focused goals which are given more
consideration than is equal access to health care. Initially, MCOs focused on event-driven cost avoidance. Strategies
included decreasing inpatient days, decreasing specialty physician use, using
physician extenders, and implementing provider discounting. This evolved into a
second stage, in which the principal objective was to control resource intensity
and improve the delivery process. Strategies used to meet this objective
included capitation of specialist costs, controls on units of service,
patient-focused redesign, clinical pathways, and total quality management.
The emphasis,
however, is now shifting to a focus on community-based health status
improvement
that goes beyond just
measuring utilization of care or mortality outcomes. This focus calls
for new strategies,
such as community health assessments, identification of high-risk
individuals, targeted
interventions, case management, and management of illness episodes
across the continuum
(Weiss, 1997, p. 28).
Weiss
(1997) believed that community health assessments will become standard quality
tools for MCOs. Community assessments establish the
baseline health status of a community and measure changes in the health of the
community over time. Community health assessments must include source
information that is both primary (health status assessment surveys, focus
groups, and satisfaction surveys) and secondary (data collected by public
health agencies and state agencies, such as birth rates, mortality rates, and
incidence of communicable diseases in the community).
Improving
the health status of a community mandates that the MCO—the organization
providing health care services through managed care agencies, such as an HMO or
PPO—be actively involved in accurately assessing the community’s health status
and the major issues facing the community. This would involve “informing health
care consumers of how to care for themselves and
empowering them to do so, and developing a community action plan that fosters
collaboration among organizations and focuses on preventive service strategies”
(Weiss, 1997, p. 29). Are these not the proposals that public health advocates
have been making for more than a century? In 2002, Drevdahl
expressed concerns regarding the paradoxical missions of public health and
managed care. One relies on partnerships for fostering health care equity and
creating healthy communities and populations as it embraces a social justice
mission, whereas the other “falls more along the line of market justice” (p.
163). Perhaps the incentive to keep costs down will be the motivation needed to
work with clients at the primary prevention level of care. Although public health
proponents have advocated preventive care as the best care for the individual,
family, and community as long as the goal of community health is reached, the
motivating factor becomes insignificant. If the community health approach is
embraced by MCOs, the conflict with public health can
be minimized and perhaps eliminated.
Managed
Care and Public Health Values
Competition in health care is a reality with which
community health practice must cope. Although competition offers several benefits,
it poses some dilemmas for community health that may be difficult to resolve.
Values underlying the 
competition model can be in
direct conflict with several basic public health values (Drevdahl,
2002). Competition for the healthier and younger enrollee, for example,
encourages MCOs to develop market strategies that
entice the client to choose one over another. This is a win-lose situation for
the MCO: one MCO wins while another loses. Public health, however, operates on the
basis of collaboration and cooperation. Competition among MCOs
serves a selected market partly determined by those who are able to purchase
products or services.
Public health is committed to serving all persons in need,
regardless of ability to pay. Traditionally, the competition model has focused
on individuals and has been oriented to the present; public health is concerned
with aggregates and is future oriented, emphasizing prevention. Competition
establishes relatively fixed limits for service, whereas public health must
remain flexible if it is to respond to the health needs of the entire
population. These dramatic differences between MCOs
and public health are beginning to blur and out of necessity will continue to
be less adversarial and more collegial. By shifting their focus to community health
as a systems outcome, MCOs can create several positive changes,
including a safe environment, wholesome nutrition, healthy lifestyle, adequate
education, sufficient income, meaningful spirituality, challenging work,
recreation, and functional families (Weiss, 1997).
If enrollees in health insurance programs from Medicare, Medicaid,
or other MCOs become empowered to assume re sponsibility for
their own self-care and well-being, a cooperative and collaborative
relationship can be achieved between MCOs and public
health. Healthy competition may remain between MCOs
for enrollees, but this level of competition will help to decrease costs and
improve quality of care, as has occurred with telephone services and utility
companies. Consumers can select their service providers, choosing the one that
best fits their needs. Competition always has improved services and lowered
costs in other markets, such as among retailers, and should do the same in the
health care industry.
There are philosophical differences as well as
constraints, such as civil service restrictions and political influences, under
which most public health agencies must operate, that make it difficult for them
to compete. Likewise, MCOs have stockholders, boards
of directors, employees, and state and federal regulations that they must
satisfy. Public health agencies must remain committed to providing the health
promotion and disease prevention services that are their public trust. This may
become the commitment of MCOs as they see the cost
savings and health benefits of disease prevention. Yet some aspects of
competition seem necessary if both forms of health care delivery are to stay in
business. Exclusion from health care competition, freedom from unreasonable
constraints, and dependable financial
support are needed to
maintain the organizational viability of many public health agencies.
Competition also may stimulate new and innovative community health services and
the introduction of new roles and revenue sources for traditional public health
agencies. The evolution of the reform of health care implementation may see developing
public and private health care partnerships, with MCOs
contracting with public health agencies for certain services and MCOs more effectively expanding the reach of public health
agencies into the suburbs or rural areas. Reform will need to continue to
address issues affecting the delivery of public health services.
SUMMARY
Health care economics studies the production,
distribution, and consumption of health care goods and services to maximize the
use of scarce resources to benefit the most people. This science underlies the
financing of the health care system. It is influenced by microeconomics as well
as macroeconomics.
Health care is funded through public and private sources,
which fall into three categories: third-party payers, direct consumer payment,
and private support. Health care services have been reimbursed either
retrospectively, typical of FFS plans, or prospectively, typical of most HMOs.
Several issues and trends have influenced community health
care financing and delivery and are important to understanding health care
economics and helping to improve community health. They include cost control,
financial access, managed care, health care rationing, competition and regulation,
managed competition, universal coverage and a single-payer system, and health
care reform.
The changing nature of health care financing has
adversely affected community health and its practice in three important ways:
(1) retrospective payment without limiting costs, tax-deductible employer
contributions for health care coverage and nontaxable employee health benefits,
together with a lack of consumer involvement in cost sharing, have created disincentives
for efficient use of resources; (2) because the health care system
traditionally has reimbursed only for treatment of the ill or disabled, with no
reward for health promotion and prevention efforts, it has promoted incentives
to focus only on illness care; and (3) the competition model, which has long
driven up health care costs and eliminated many from being able to afford
health care services, has generated a conflict with the basic public health
values of health promotion and disease prevention for all persons. Health care reform
efforts in the 1990s focused on reversing these patterns by combining positive
elements of competition, free enterprise, and regulation to allow all
individuals access to adequate health care and to bring MCOs
more in line with the goals of public health. However, unexpected challenges to
homeland security and international crises bringing us to the brink of war have
kept the concerns for rising health care costs off federal agendas as
legislators deal with other pressing issues.
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American Public Health Association.
(1998a). Managed care reform: Fact sheet.
American Public Health Association.
(1998b). Regulatory reform: Fact sheet.
ASTRO (American Society for Therapeutic Radiology and Oncology). (2004). Healthcare economics. Retrieved February 14, 2004,
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Brink, S. (2002). Living on the edge. U. S. News & World Report, 133(14),
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Center for Medicare and Medicaid Services.
(2002). Retrieved October 3, 2003, from http://www.cms.gov
Conger, M.M. (1999). Managed care: Practice strategies for nursing.
Internet
Resources
American
Nurses Association: http://www.nusingworld.org/readingroom/rnagenda.htm
Center
for Medicare and Medicaid Services: http://www.cms.hhs.gov
Joint
Commission on Accreditation of Healthcare Organizations: http://www.jcaho.org
Kaiser
Family Foundation: http://www.kff.org
Medicaid:
http://www.medicaid.gov
Medicare:
http://www.medicare.gov
National
Committee for Quality Assurance: http://www.ncqa.org