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LECTURE 2The Evolution of the US

Health Care System

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Outline

Evolution of Private Insurance The Need for Public Insurance Current Trends Evolution of Medicine

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The Evolution of the Private Insurance Market

At the turn of the 20th century medicine was becoming big business. The average American spent about $100/year

in today’s dollars Advent of medicines that actually worked and

other innovations resulted in large increases in demand for doctors and hospital services.

By the early 1930s healthcare accounted for about 4% of GDP

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The Private Insurance Market

Great Depression Average hospital receipts fell by 75% Rufus Rorem: University of Chicago, economist and

chair of AHA’s Committee on Uniform Accounting He suggested charging a modest monthly payment

in exchange for free access to hospital care Initially about $.50 per month Baylor Hospital marketed to local school teachers Hospitals in St. Paul, MN were the first to use the

Blue Cross Name Blue Shield plans followed – focused on physician

care

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The Private Insurance Market

By 1940 there were fifty-six plans with six million enrollees in nearly every state.

But still only about 9% of individuals had insurance coverage.

Indemnity health insurance plans Prepayment of pooled premiums Enrollees could choose any hospital Plans paid hospitals on a fee-for-service basis No copayments

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The Private Insurance Market

Commercial for-profit insurance soon followed Aetna in 1936 Cigna in 1937

By 1940 commercial indemnity insurers had matched the Blues enrollment of 6 million

2/3 of all policies were sold to groups --mainly employers

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The Private Insurance Market

World War II In 1942 National War Labor Board imposed wage

and price freezes to prevent inflation Demand for labor increasing, supply of labor

decreasing Employers increasingly offered nonwage benefits,

including health insurance Many of these benefits were not taxable The Revenue Act of 1954 made the tax exemption

permanent and comprehensive For the typical worker in the 15% tax bracket, the

cost of insurance is reduce by about a third. For higher income workers the subsidy is even greater.

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The Private Insurance Market

By 1944 hospital insurance covered 29 million people.

By 1954 more than on hundred million had coverage and fifty million had coverage for physician expense

70 percent of those insured were under group coverage primarily through their employer

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The Private Insurance Market

The Employer-based system worked well for those with employment Large risk pools Increased bargaining power Implicit mandate

But a large part of the population was left out Elderly and indigent

1965 Social Security Amendments Medicare and Medicaid

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Public Insurance

MedicarePart A – Hospital Coverage

(mandatory)Part B – Physician Coverage (optional)Part C – Managed Care OptionPart D – Prescription Drug Coverage

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Public Insurance

MedicaidHealth insurance coverage for low

income children and adultsAssistance to Medicare beneficiaries

(aged and disabled)Long-term care assistance

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The Public Private Blend

By the 1970s about 90 percent of Americans had reasonably complete health insurance

Most privately insured were covered through their employer

Private insurance market dominated by nonprofits – mostly community rating

Viable safety net existed for those without insurance

Access was not really a policy issue But then people started to worry about costs

13Source: NY Times April 28, 1968

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Changes over time

Employer-based coverage peaked in the 1980s and has been slowly declining.

Movement away from community rating to experience rating. “quasi-social insurance” nonprofit Blues with large firms. Unions played key role

Movement of for-profit insurance moved toward experience rated plans

Movement to self insure

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The Managed Care Era

In the 1990s we turned to managed care to control cost Under 30 percent of the population in the late

1980s Over 90 percent a decade later

“The reversal of economics” Fee-for-Service: moral hazard and supplier

induced demand Capitation: providers were required to hold

risk Narrowed networks

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The Managed Care EraYear Total

Health Spending ($billion)

Per Capita Health Spending

Inflation Adjusted health spending

Annual inflation in health spending

Health Spending as a % of GDP

1980 $255 $1,110 $2,640 3.9% 9.1%

1990 720 2,820 4,220 4.8 12.4

1993 910 3,470 4,700 3.7 13.7

1997 1,130 4,100 5,000 1.6 13.6

2000 1,350 4,790 5,440 2.9 13.8

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The Managed Care Era

Direct connection between managed care penetration and slowdown in health spending Spending = Price x Quantity Selective contracting resulted in substantial

discounts from providers Some evidence HMO patients received fewer

services Was quality lower?

Studies on HMO quality are almost equally divided between those showing HMOs provide higher quality, HMOs provide lower quality, and no difference in quality

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The Managed Care Era

Thus HMOs appeared to bend the cost curve without a sacrifice in quality

So what happened? Provider income was reduced Lack of choice was associated with lack of

quality Lack of transparency to savings HMOs became the bad guys

Harris Survey: 1997 51% said managed care was doing a “good job” in 2000 this fell to 29% Only tobacco ranked lower

Provider consolidation

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Flaws in the Employer-Provided System

Administrative costs – on the order of 13-16% of premium. Does not include administrative costs on the provider or employer’s side.

Allocation of costs – higher wage workers pay less when account for tax savings

Labor relations Misaligned incentives

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Trends in Coverage

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Trends in Coverage

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Trends in Coverage

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Trends in Coverage

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Trends in Coverage

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Trends in Coverage

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The Evolution of Medicine

In the early 19th century medical science was primitive Few demonstrable benefits to patients Not much state licensure (strong movement

against) Basically an apprentice system

The late 19th century brought economic and technological developments Antisepsis and anesthesia Medicine achieved the ability to actually

benefit patients

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The Evolution of Medicine

Johns Hopkins Medical School Established in 1893 Required all entrants to hold college degrees

and complete four additional years of study for graduation

Leading university-based medical schools adopted this model

Licensure laws were passed in every state by 1901

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The Flexner Report

A study initiated by the AMA and conducted by the Carnegie Foundation

Named after Abraham Flexner, the researcher who conducted the report

Found a high percentage of medical schools were inadequate beyond remedy No qualified faculty, laboratories, or

attendance requirements Resulted in large-scale closure of medical

schools that did not conform to the Johns Hopkins model

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The Flexner Report

While improving quality, it greatly restricted entry 131 US medical schools operating in 1906

dropped to 81 by 1922 (today there are 141 MD granting institutions in the US).

3535 graduates in 1915 declined to 2529 by 1922 (over 17,000 in 2011).

Schools that admitted African Americans or women were largely those considered irremediable

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The AMA

Founded in the 1840s the American Medical Association championed modern scientific medicine Played an important part in reinstatement of licensure

and requirements of medical education Started as a progressive organization

Became more conservative in the 20th century. Stove to keep the supply of physicians low, despite a

increasing population Opposed both expansion of medical education and

immigration of foreign physicians Opposed health insurance when it first appeared Excluded physicians involved with HMOs Opposed Medicare and Medicaid

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The AMA

While still a powerful organization, the AMA has lost some of its power Much more diverse physician population Other important interest groups

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What We Learned

Patchwork network of access to care Evolved mostly by historical accident

Managed Care seemed to succeed but was unpopular

Trends in coverage Rising insurance premiums Offer rates have fallen for workers in small and low wage

firms Employees paying a larger share of coverage

Flexner Report Role of AMA in increasing quality and restricting

entry