healthcare report 2009

Healthcare Industry Report Fourth Edition | 2009

KPMG LLP

HEALTHCARE & PHARMACEUTICAL INSTITUTE

© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A. KPMG Forensic is a service mark of KPMG International. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. 33253SFO

The perspective of each element of the U.S. healthcare system must be understood before effective reform proposals can be implemented.


KPMG LLP is pleased to present the fourth edition of our Healthcare Industry Report, which is sponsored by the KPMG Healthcare & Pharmaceutical Institute. This report includes the perspectives of consumers, employers, health plans, hospitals, nursing homes, physicians, pharmaceutical companies, and government.

Healthcare delivery and financing in the United States are costly, complex, and widely misunderstood. Problems are quickly identified and widely known—high cost, uneven quality, and the uninsured. Solutions to these problems are elusive, and proposed solutions often appear to treat the symptoms rather than the underlying cause. The development of effective solutions requires a thorough understanding of the U.S. healthcare system and how it works. The purpose of this report is to contribute to that understanding.

The U.S. healthcare system must improve its performance. However, proposed changes must be carefully evaluated to ensure that unintended consequences do not overshadow the intended benefits.

In this report, there is more material on healthcare outside the United States than was in previous editions. The United States can learn a lot from the way other countries organize, deliver, and finance healthcare for their citizens. We have also increased the data presented on the factors that drive healthcare costs in the United States. Only by addressing these factors can the United States hope to effectively reform its healthcare system.

Introduction


Table of Contents

Overview 1

Health Status 9

Healthcare Quality 17

National Health Expenditures 23

The Consumer Perspective 29

The Employer Perspective 37

The Health Plan Perspective 43

The Hospital Perspective 51

The Nursing Home Perspective 61

The Physician Perspective 65

The Pharmaceutical Company Perspective 73

The Government Perspective 83

The Uninsured 87

Healthcare Reform 93

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.


Healthcare Industr y Report 1


Overview



Until the recent decline in the U.S. economy, most healthcare organizations were doing well. The lack of liquidity in the financial markets came as a surprise to almost everyone, and healthcare companies were no exception.

The next couple of years will be challenging as healthcare companies face slower growth or reduced revenue caused by a weak economy. Also, President Obama is committed to healthcare reform, and his party controls both houses of Congress.

A survey by Modern Healthcare was published the week of the election regarding the likelihood of major healthcare reform legislation during the Obama administration. There was a wide diversity of opinion expressed, but 70 percent thought passage was likely or possible.1

During the presidential campaign, the healthcare discussion was focused on providing insurance coverage for the uninsured. This focus is appropriate, but the uninsured are the result, not the cause, of our major healthcare problems. The big problems are the high, rapidly increasing cost and the inconsistent quality of care. These issues must be addressed directly if reform efforts are to be successful.

Change is in the air.

U.S. Healthcare Spending

The Centers for Medicare and Medicaid Services (CMS) estimate that U.S. healthcare expenditures in 2008 were $2.4 trillion (that’s $2,400,000,000,000). Of this amount, 12 percent was paid by consumers, 34 percent was paid by private health insurers, 7 percent was paid using other private funds, and 47 percent was paid by various levels of government.2

Consumer out-of-pocket costs are paid for deductibles, co-payments, and expenses that are not covered by insurance. For the uninsured, which make up about one-sixth of the population, all healthcare payments are out-of-pocket.

Private health insurance consists of employer-sponsored healthcare plans for employees and individual health policies for those that purchase them outside the workplace. These plans cover approximately one-half of the U.S. population.

Government health programs include the Medicare and Medicaid programs for the elderly, poor, and disabled; health plans for the military and other government employees; and other government healthcare programs. These programs cover approximately one-third of the U.S. population. However, the cost of taking care of the elderly and disabled is higher than average, so the government share of the cost is higher than one-third.

Other private funds include charitable contributions made to healthcare organizations by individuals and philanthropic organizations.

Each year, CMS projects healthcare costs for 10 years into the future. The current projections indicate that U.S. healthcare expenditures will increase to $4.3 trillion in 2017, roughly double the expenditures 10 years earlier. Healthcare costs are expected to increase at almost 7 percent per year during a period in which the U.S. economy is expected to grow at less than 5 percent, increasing healthcare costs to 19.5 percent of GDP in 2017.

The payor group percentages remain approximately the same during the period, so every payor can expect their share of healthcare costs to double during the next decade.3

The U.S. government also prepares annual estimates of the future cost of the Social Security and Medicare programs. The results are startling.

Overview

National Health Expenditure by Payor (in Billions)

Source: Modern Healthcare, “Maybe He Can”, page 7, November 10, 2008.

What is the likelihood of major healthcare reform legislation passing during Barack Obama’s presidency?

Source: Centers for Medicare and Medicaid Services, “National Health Expenditure Accounts, 2006 Highlights”, 2008.

NHE by Payor

State & Local Government, $303

Out-of-pocket, $283

Private Health Insurance, $822

Other Private Funds, $181

Federal Government, $807

Will Obama Change the Healthcare System?

Likely 36%

Don’t Know 2%

Unlikely 28%

Possible 34%



The estimates in the table above are the actuarial present value of the programs for a 75-year period. The estimates include offsets for income that is specifically designated to support the programs, such as Social Security taxes and Medicare premiums. The current net liability for these programs is $42.9 trillion, approximately three times the 2008 U.S. Gross Domestic Product.4 In other words, it would take the equivalent of three years of the total output of the U.S. economy to fund the current liability for these entitlement programs. In addition, the liability grew $2.0 trillion in 2008, more than 75 percent of the total revenue of the U.S. government for that year. More than 80 percent of the total is for Medicare. Medicaid is not included.

Clearly, we have made promises that we cannot keep.

A Word about Quality

One would expect that a high-cost healthcare system would also be a high-quality healthcare system. This is not the case. By many measures, the quality of U.S. healthcare lags other developed countries. Not only is our life expectancy shorter than countries that spend far less, our infant mortality rate is higher, and medical errors are more frequent.5

The good news is that the quality of care in the United States has improved. The publication of To Err Is Human by the Institute of Medicine (IOM) in 2000 focused everyone in the healthcare business on quality and patient safety.6 To Err Is Human pointed out the level of medical errors in U.S. hospitals, and presented a plan for reducing them. Several subsequent IOM reports addressed healthcare quality and patient safety issues in more detail.

There are currently a number of organizations, both public and private, addressing the issues of quality measurement and improvement. Most healthcare provider and payor organizations are currently very involved in quality improvement efforts, and those efforts are yielding significant benefits.

Healthcare Employment

Healthcare delivery is very labor intensive.

Representing about one-sixth of the U.S. economy, the healthcare industry is a major employer. As the U.S. economy has shifted from a manufacturing to a service economy, healthcare has been a major source of job growth as employment in manufacturing declined. In fact, hospitals are the second biggest employers in the United States, employing more than four million Americans. 7

Present Value of U.S. Government Entitlement Programs September 30, 2008 (in billions)

Social Security Expenditures Revenue Net Expenditures

$42,911 $36,357 $6,555

Medicare Expenditures Revenue Net Expenditures

Hospital $24,619 $11,883 $12,736Supplementary Medical Insurance

$21,197 $5,478 $15,719

Drugs $9,964 $2,107 $7,857

Total $55,780 $19,468 $36,312

Total $98,691 $55,825 $42,867

Totals may not equal sum of components due to rounding. Source: U.S. Department of the Treasury, “2008 Financial Report of the U.S. Government”, 2008.

Overview



Employment in Various Industries (in thousands)

Source: American Hospital Association, “AHA Trendwatch Chartbook 2008”, 2008.

Any significant reduction in the growth of healthcare costs will likely limit the growth of healthcare jobs. This fact must be carefully considered as Congress and others contemplate healthcare reform proposals.

Healthcare Information Technology

U.S. healthcare companies have invested less in information technology than many other information intensive businesses. Most of the attention in this area has been on implementing electronic medical records, but there has also been underinvestment in basic business systems.

Information technology spending varies widely, but about 35 percent of hospitals spend less than 2 percent of their operating budgets on technology. This may be insufficient to allow those organizations to reap the benefits of the advanced systems that are currently available.8

Percentage of Operating Budget Allocated to Information Technology

Overview

Employment in Various Industries (in thousands)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Full-serviceRestaurants

General Medical

& SurgicalHospitals

Limited-serviceEating Places

EmploymentServices

Grocery Stores

PhysicianOffices

BuildingEquipmentContractors

DepartmentStores

Percentage of Operating Budget Allocated to Information Technology

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

<.05

%

.6%–1

%

1.1%

–1.5%

1.6%

–2%

2.1%

–2.5%

2.6%

–3%

3.1%

–3.5%

3.6%

–4%

4.1%

–4.5%

4.6%

–5%

5.1%

–5.5%

5.6%

–6%

>6%

Per

cen

tag

e o

f H

osp

ital

s in

Cat

ego

ry

Source: Modern Healthcare, “By the Numbers – 2007/8 Edition”, December 24, 2007.

Electronic medical records can contribute significantly to reducing the cost and improving the quality of healthcare services. The United States lags many other countries in the implementation of electronic medical records. A contributing factor is that some foreign governments provide significant financial support.9



Per Capita Public Investment in Healthcare IT

Overview

Per Capita Public Investment in Healthcare IT

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

United Kingdom Canada Germany Australia United States

Source: Commonwealth Fund, calculated from Anderson, G.F., Frogner, B., Johns, R.A., and Reinhardt, U., “Healthcare Spending and the Use of Information Technology in OECD Countries”, Health Affairs, 2006.

To date, the U.S. government has not provided significant financial support for the implementation of electronic medical records. However, almost all of the reform proposals currently under consideration include provisions for future government support of electronic medical records.

Healthcare Industry Report

Each element of our healthcare industry is a distinct business with its own economic model, business issues, and concerns. In this report, we refer to this combination of factors as the perspective of each element of the industry.

The perspective of each element must be understood before effective reform proposals can be implemented. Our purpose in preparing this report is to contribute to this understanding.

Successful healthcare reform proposals should result in the healthcare organizations working together more effectively. The primary risk in healthcare reform is the risk of unintended consequences, which are likely if one element of the industry is unduly advantaged or disadvantaged in the reform process. Understanding the perspective of each element of the industry is critical to minimizing unintended consequences.

Health Status Our report begins with an assessment of the health status of the U.S. population. While our health has improved dramatically over time, the United States lags most developed countries in critical measures of health status. In addition, we live increasingly unhealthy life styles; eat, smoke, and drink too much; and exercise too little. As a result, we are in the midst of an epidemic of preventable chronic disease, which is killing us both physically and fiscally.

Healthcare Quality and National Healthcare Expenditures These topics are summarized above and discussed in detail in the report.

The Consumer Perspective Consumers are very concerned about the affordability of the care they receive. Their share of healthcare costs continues to increase at a faster rate than general inflation or their earnings. At the same time, and for the same reason, employers are reducing health benefits for their employees and retirees.

The Employer Perspective



Employers continue to be frustrated by continuing increases in healthcare premiums. As a result, employers are reducing coverage and shifting more of the costs to their employees. Employers are looking into new types of health plans, such as high-deductible health plans with medical saving accounts, to motivate their employees to become better healthcare consumers. Large employers are increasingly shifting to employer-funded programs to reduce costs and make them more predictable. The burden of high healthcare costs is considered to be an impediment to U.S. competitiveness in the global economy.

The Health Plan Perspective Health plans have been very profitable for the past few years. They have been able to increase premiums at least as fast as medical costs were increasing. In addition, enrollment in Medicare and Medicaid plan membership was increasing rapidly.

This trend reversed in 2008, and health plans have reported declining earnings. Health plans also face increased uncertainty regarding future pricing of Medicare and Medicaid plans and flat or declining commercial enrollment.

The Hospital Perspective Average hospital margins have also increased during the past several years, even though 25 percent of hospitals continue to have negative margins.10 Hospital margins are expected to decline in 2008 and 2009. Hospitals are very concerned about payment rates for federal programs, since the average hospital currently loses money on its Medicare and Medicaid patients. Hospitals are also facing increased bad debt expenses, partly as a result of cost-shifting by health plans. In addition, increasing operating costs are being intensely scrutinized as hospitals work to become more efficient.

The Nursing Home Perspective Two-thirds of nursing home patients are paid for by Medicaid. As a result, the current budget deficits in many states and Medicaid payment reductions in a few are of great concern to nursing homes. The number of homes has declined in recent years, which has increased the occupancy of those that remain. However, nursing homes remain a low-margin business.

The Physician Perspective Physicians are generally doing well financially, although some are working harder than ever to maintain their incomes. They are concerned, as always, about the high complexity and low payments involved in the billing process. The fact that physicians are highly specialized and generally work alone or in small groups could impair their ability to easily adapt to the changes resulting from healthcare reform.

The Pharmaceutical Company Perspective Pharmaceutical companies have historically been the largest, most profitable healthcare companies as a result of their development of blockbuster drugs. While the major drug companies remain quite profitable, they face new challenges. Developing new drugs is increasingly expensive and uncertain. A number of blockbuster drugs currently on the market face patent expirations in the near future, and there is increased pricing pressure from government payors and others. Pharmaceutical companies are reacting by transforming their business models, creating new ventures especially in the biotech arena, focusing on their core competencies, and outsourcing noncore activities.

The Government Perspective

Overview



Government is involved in all aspects of healthcare. Various levels of government pay approximately 47 percent of total healthcare expenditures.11 Government organizations also provide patient care, sponsor and perform medical research, and create legislation and regulations that govern all aspects of healthcare. The major challenges facing government are to fund existing government healthcare programs, cover the uninsured, and promote the effective reform of our healthcare system.

Healthcare Reform Last, we provide our insights into how current healthcare reform proposals could impact the cost and quality of future U.S. healthcare products and services.

Conclusion

Well, that’s the summary. We now invite you to get into the details. We hope that you find the analysis that follows interesting and valuable.

Notes:

1. Modern Healthcare, “Maybe He Can”, page 7, November 10, 2008.

2. Centers for Medicare and Medicaid Services, “National Health Expenditure Accounts, 2006 Highlights”, 2008.

3. Centers for Medicare and Medicaid Services, “National Health Expenditure Projections, 2007–2017”, 2008.

4. U.S. Department of the Treasury, “2008 Financial Report of the U.S. Government”, 2008.

5. Organisation for Economic Co-operation and Development, “OECD Health Data, 2008”, July 2008.

6. Institute of Medicine, To Err Is Human, Linda T. Kohn, Janet M. Corrigan, and Molla S. Donaldson, Editors, National Academy Press, 2000.

7. American Hospital Association, “AHA Trendwatch Chartbook 2008”, 2008.

8. Modern Healthcare, “By the Numbers – 2007/8 Edition”, December 24, 2007.

9. Commonwealth Fund, calculated from Anderson, G.F., Frogner, B., Johns, R.A., and Reinhardt, U., “Healthcare Spending and the Use of Information Technology in OECD Countries”, Health Affairs, 2006.

10. Modern Healthcare, “By the Numbers – 2007/8 Edition,” based on American Hospital Association data, December 24, 2007.

11. Centers for Medicare and Medicaid Services, “National Health Expenditure Accounts, 2006 Highlights”, 2008.

Overview



Health Status



0

50

100

150

200

250

Pneum

onia &

Influ

enza

Tuber

culo

sis

Diarrh

ea &

Inte

stin

al D

iseas

e

Heart

Diseas

e

Stroke

Kidney

Dise

ase

Accid

ents

Cance

r

Senili

ty

(Alzh

eim

er's

Diseas

e)

Diphth

eria

Lower

Res

pirato

ry D

iseas

e

Diabet

es

Septic

emia

Dea

th R

ate

per

100

,000

Po

pu

lati

on

1900 2005

Life Expectancy in Years

60

65

70

75

80

85

1971 1981 1991 1997 1998 1999 2000 2001 2002 2003 2004Male Female

• The long-term progress of the U.S. healthcare system in fighting disease and improving the health of the U.S. population has been truly amazing.

• Of the 10 top causes of death in 1900, 3 were no longer on the list in 2005. Tuberculosis, diarrhea and intestinal disease, and diphtheria are infectious diseases that killed millions before being brought under control by improvements in sanitation and the development of vaccines and antibiotics.

• The incidence of heart disease and cancer increased during the 20th century largely due to longer life expectancy and unhealthy lifestyles. These diseases represent a significant challenge to the U.S. healthcare system in the 21st century.

• Progress in treating disease has led to a continuing increase in life expectancy for both men and women in the United States.

Life Expectancy

Top 10 Causes of Death

Sources: National Center for Health Statistics, “National Vital Statistics Report, Volume 56, Number 10” and “Death and Death Rates for Leading Causes of Death: Death Registration Stats: 1900–1940” and Centers for Disease Control and Prevention, “Health, United States, 2007”, December 2007.

Health Status



2005 Male Life Expectancy (in years)

60 65 70 75 80 85 90

Australia

Austria

Belgium

Canada

France

Germany

Greece

Japan

Mexico

Netherlands

Spain

Switzerland

Turkey

UK

USA

2005 Female Life Expectancy (in years)

60 65 70 75 80 85 90

Australia

Austria

Belgium

Canada

France

Germany

Greece

Japan

Mexico

Netherlands

Spain

Switzerland

Turkey

UK

USA

• In spite of the progress made in the past, the U.S. healthcare system doesn’t measure up well against other developed countries.

• Based on data from the Organisation for Economic Co-operation and Development (OECD), life expectancy and other key health indicators are lower than in other developed countries.

• Among developed nations, the United States ranked near the bottom in life expectancy in 2006 for both males and females.

• Women live longer than men in all OECD countries, generally by about five to six years.

Source: Organisation for Economic Co-operation and Development, “OECD Health Data 2008,” June 2008

2006 Female Life Expectancy

2006 Male Life Expectancy

Health Status



2005 Infant Mortality - Deaths per 1000 Live Births

0 5 10 15 20 25

AustraliaAustria

BelgiumCanadaFrance

GermanyGreeceJapan

MexicoNetherlands

SpainSwitzerland

TurkeyUK

USA

Infant Mortality Rate

0

5

10

15

20

25

30

35

1950 1960 1970 1980 1990 2000 2001 2002 2003 2004

Deaths per 1000 Live BirthsObesity - %of Adult Population

0% 10% 20% 30% 40%

Japan

France

Netherlands

Germany

Spain

Canada

United Kingdom

United States

Percentage of Adults (20-74) That are Obese

0%

5%

10%

15%

20%

25%

30%

35%

40%

1962 1974 1980 1994 2000 2002 2004

• The United States ranks near the bottom of developed countries in infant mortality.

• U.S. infant mortality is more than twice that of Japan.

• Infant mortality in less-developed countries, such as Mexico and Turkey, is much higher than in more-developed countries.

• The good news is that infant mortality in the United States has steadily declined over the past 50 years.Infant Mortality Trend

2006 Infant Mortality—Deaths per 1,000 Live Births

Sources: Organisation for Economic Co-operation and Development, “OECD Health Data 2008”, June 2008 and Center for Disease Control and Prevention, “Health, United States, 2007”, December 2007.

Sources: Organisation for Economic Co-operation and Development, “OECD Health Data 2008”, June 2008 and Center for Disease Control and Prevention, “Health, United States, 2007”, December 2007.

• One factor contributing to the poor health status of U.S. citizens is that we don’t take very good care of ourselves.

• The United States has more obese adults than other developed nations.

• Recent data from the Centers for Disease Prevention and Control indicate that more than half of U.S. adults are overweight or obese. Obesity is defined as 20 percent or more over the “healthy weight” for an individual’s height and sex.

• Obesity is linked to an increased incidence of a number of diseases, including high blood pressure, heart disease, diabetes, stroke, and certain cancers.

• Unfortunately, the number of obese adults in the United States is increasing rapidly.

Percentage of Adults 20–74 That Are Obese

Obesity – Percentage of the Adult Population

Health Status



Smokers as a Percentage of Population over 18

0%

10%

20%

30%

40%

50%

60%

1965 1974 1979 1982 1985 1987 1988 1990 1991 1992 1993 1994 1995 1997 1998 1999 2000 2001 2002 2003 2004 2005Men Women

% of Daily Smokers over Age 15

0% 5% 10% 15% 20% 25% 30% 35%

Austria

Belgium

Canada

France

Germany

Italy

Japan

Netherlands

Portugal

UK

USA

• Fewer Americans smoke than the residents of most other developed countries.

• Fifty-four percent of U.S. adults have never smoked cigarettes, and another 23 percent used to smoke but have quit. Twenty-three percent currently smoke.

• Smoking rates were cut in half between 1965 and 2005, but even at the current reduced level, smoking is a major cause of illness and death.

• More men than women smoke, and about half of current smokers started smoking before age 17.

• Smoking is linked to an increased incidence of a number of diseases, including heart disease, stroke, and certain cancers.

• The effort to reduce the number of American smokers took a long time, but the results have been dramatic. Nevertheless, smoking is still a leading cause of death in the United States.

Sources: Organisation for Economic Co-operation and Development, “OECD Health Data 2008”, June 2008; U.S. Center for Disease Control and Prevention, “Health, United States, 2007”, December 2007; and Department of Health and Human Services, Centers for Disease Control and Prevention, “Health Behaviors of Adults: United States, 1999–2001,” 2004

Smokers as a Percentage of the Population Over 18

Percentage of Daily Smokers Over Age 15

Health Status



Per Capita Alcohol Consumption (in liters)

0 2 4 6 8 10 12 14

AustraliaAustria

BelgiumCanada

DenmarkFrance

GermanyGreece

ItalyJapan

MexicoNetherlands

PortugalSpain

SwitzerlandTurkey

UKUSA

Leisure Time Physical Activity

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Inactive Some Leisure-time Activity Regular Leisure-time Activity

Male Female

• The United States is slightly below average in per capita alcohol consumption compared to other developed countries.

• Almost two-thirds of U.S. adults currently drink alcohol. Heavy use of alcohol is linked to an increased incidence of liver disease and certain cancers.

• Almost 40 percent of U.S. adults do not exercise at all in their leisure time.

• The Centers for Disease Control and Prevention indicate that adults need vigorous exercise three times a week or light to moderate exercise four or five times a week to maintain the recommended level of fitness.

Sources: Organisation for Economic Co-operation and Development, “OECD Health Data 2008”, June 2008; U.S. Center for Disease Control and Prevention, “Health, United States, 2007”, December 2007; Department of Health and Human Services, Centers for Disease Control and Prevention, “Health Behaviors of Adults: United States, 1999–2001,” 2004

Leisure Time Physical Activity

Per Capita Alcohol Consumption (in Liters)

Health Status




Cancer - Incidence per 100,000 Population Under Age 70

0 100 200 300 400 500 600 700 800 900 1000

Austria

France

Germany

Japan

Netherlands

OECD Median

United Kingdom

United States

Circulatory Disease - Incidence per 100,000 Population Under Age 70

0 100 200 300 400 500 600 700 800

Austria

France

Germany

Japan

Netherlands

OECD Median

United Kingdom

United States

Diabetes - Incidence per 100,000 Population Under Age 70

0 10 20 30 40 50 60 70 80 90 100

Austria

France

Germany

Japan

Netherlands

OECD Median

United Kingdom

United States

Treatment of Chronic Disease

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Hypertension (66.3 million people)

Diabetes (19.9 million people)

Hyperlipidemia (75.2 million people)

Treated & Controlled Treated but Uncontrolled Untreated Undiagnosed

• Cancer and heart disease are a significant cause of death worldwide. Treating these diseases also consumes a significant portion of total healthcare costs in developed countries.

• Cancer is a serious problem in all countries with incidence rates of 0.7 percent–1.0 percent in all countries shown.

• Heart disease varies more widely, with the United States having the highest incidence rate by far. This is likely linked with the high rate of obesity in the United States.

Cancer Incidence Per 100,000 Population under Age 70

Circulatory Disease Per 100,000 Population under Age 70

Diabetes per 100,000 Population under Age 70

• The incidence of diabetes in the United States is also significantly higher than in other developed countries.

• The high rate of diabetes is also linked to the high rate of obesity.

• Diabetes is an insidious disease. It can lead to blindness, amputation, heart disease, and kidney disease. When not controlled, it can be very costly to treat.

• The treatment of chronic disease can be very expensive.

• The cost of chronic disease can be significantly reduced if it is diagnosed early, treated promptly, and controlled.

• Unfortunately, chronic disease is often undiagnosed, untreated, and uncontrolled.

Sources: Organisation for Economic Co-operation and Development, “OECD Health Data 2008”, June 2008 and PhRMA, based on National Health and Nutrition Examination Survey, E.A McGlynn et al., “The Quality of Health Care Delivered to Adults in the United States”, The New England Journal of Medicine, June 2003.

Health Status

Treatment of Chronic Disease




Healthcare Quality



HEDIS Measures - Commercial

Breast Cancer Screening

Childhood Immunizations

Flu Shots for Adults

Advising Smokers to Quit

Beta-Blocker Treatment After a Heart Attack

2003 2004 2005 2006 2007

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Percentage of Recommended Care Received

0% 10% 20% 30% 40% 50% 60% 70%

Low Back Pain

Coronary Artery Disease

Hypertension

Depression

Orthopedic Conditions

Colorectal Cancer

Asthma

Benign Prostatic Hyperplasia

Hyperlipidemia

Diabetes

Headaches

Urinary Tract Infection

Hip Fracture

Alcohol Dependence

• Health Plan Effectiveness Data and Information Set (HEDIS) scores measure the rate of occurrence of recommended treatments among the applicable populations of health plan members.

• Quality measurement is receiving a lot of focus, and new measures are under development.

• The decline in breast cancer screening is at least partially due to a change in the specifications for the measure in 2006.

• The flu shot data is heavily influenced by the availability of an effective vaccine. There were vaccine shortages in 2004 and 2005.

• A study conducted by RAND Corporation compared what was done to treat a wide variety of health issues in many cities against established standards of recommended case.

• The results indicated that recommended care is delivered only a little over half of the time.

• In addition, the care provided to African-and Hispanic-Americans is lower quality than the care provided to white Americans.

HEDIS Measures – Commercial

Sources: National Committee for Quality Assurance, “State of Health Care Quality, 2008,” 2008; and the National Business Group on Health, “The Imperative for Health Reform”, from E.A McGlynn et al., “The Quality of Health Care Delivered to Adults in the United States”, November 2007.

Percentage of Recommended Care Received

Healthcare Quality



CAHPS Survey

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Rating of Health Plan Rating of Health Care Getting Needed Care

2003 2004 2005 2006 2007

Deaths Due to Medical Errors (per 100,000 population)

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8

Australia

Canada

France

Germany

Japan

Netherlands

OECD Median

United Kingdom

United States

• Consumer Assessment of Health Plans Study (CAHPS) is a survey of health plan members to assess the quality of the service they receive. CAHPS scores are the percentage of respondents who indicated that the attribute was “always” or “usually” provided or was “not viewed as a problem.” Health plan ratings are the percentage of respondents rating the service as 8 or more on a scale of 10, with 10 being the most positive rating.

• CAHPS scores for both health plans and providers declined in 2006 and 2007, while the score for getting needed care improved.

• The death rate in the United States due to medical errors exceeds that in other developed countries. Reducing this rate is a primary focus of quality improvement efforts in the United States.

• The Institutes of Medicine sensitized the U.S. public to the issue of medical errors with the publication of To Err Is Human in 2000. The book indicated that between 44,000 and 98,000 people die each year in the United States as a result of medical errors.

Sources: National Committee for Quality Assurance, “State of Health Care Quality, 2008,” 2008; The Commonwealth Fund based on Organisation for Economic Co-operation and Development, “OECD Health Data 2006”, June 2006.

CAHPS Survey

Deaths Due to Medical Errors (per 100,000 Population)

Healthcare Quality



Avoidable Deaths Due to Unexplained Variations in Care

Colorectal Cancer Screening, 9,300

Controlling High Blood Pressure, 16,000

Cholesterol Management, 6,900

Diabetes Care - HbA1c, 11,500

Smoking Cessation, 8,850

Prenatal Care, 1,300

Beta-Blocker Treatment, 850

Cervical Cancer Screening, 700

Breast Cancer Screening, 450

Avoidable Medical Costs Due to Unexplained Variations in Care

Beta-Blocker Treatment, $8

Breast Cancer Screening, $89

Colorectal Cancer Screening, $348

Cholesterol Management, $41

Diabetes Care - HbA1c, $1,500

Osteoporosis Management, $10

Smoking Cessation, $699

Controlling High Blood Pressure, $500

Avoidable Deaths Due to Unexplained Variations in Care

Avoidable Medical Costs Due to Unexplained Variations in Care (in Millions)

• Failure to provide quality care has serious personal and economic consequences.

• According to the National Committee for Quality Assurance (NCQA) more than 55,000 lives could be saved each year if all health plans delivered care equivalent to the 90th percentile health plans for the measures included in the chart.

• High-quality care is less expensive than lower-quality care. The NCQA estimates that $3.2 billion could be saved annually if all health plans delivered care equivalent to the 90th percentile health plans for the measures included in the chart.

• The number of deaths and the avoidable medical costs for the conditions in the charts are the midpoints of ranges determined by the NCQA.

Source: National Committee for Quality Assurance, “State of Health Care Quality, 2007” 2007.

Healthcare Quality



Estimated Sick Days Due to Suboptimal Care (in millions)

0 2 4 6 8 10 12 14

Depression

Asthma

Diabetes

Heart Disease

Hypertension

Lost Productivity Due to Suboptimal Care (in billions)

$0.0 $0.5 $1.0 $1.5 $2.0 $2.5

Depression

Asthma

Diabetes

Heart Disease

Hypertension

MRIs per Million Population

0 5 10 15 20 25 30 35 40 45

Australia

Austria

Belgium

Canada

France

Germany

Greece

Japan

Mexico

Netherlands

Spain

Switzerland

Turkey

UK

USA

Childhood Vaccinations - Aged 2

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Australia

Finland

Ireland

Japan

Mexico

New Zealand

Norway

Slovakia

Sweden

Switzerland

United States

• Failure to receive quality care also reduces employee productivity. Patients receiving suboptimal care are sick more often.

• According to the NCQA, Americans with the five conditions in the charts miss 45 million days of work because they do not receive appropriate care.

• The additional sick days cost employers $7.4 billion in lost productivity.

Estimated Sick Days Due to Suboptimal Care (in Millions)

Lost Productivity Due to Suboptimal Care (in Billions)

MRIs Per Million Population

Childhood Vaccinations

Source: National Committee for Quality Assurance, “State of Health Care Quality, 2007,” 2007.

• Magnetic resonance imaging (MRI) machines are high-resolution imaging machines used to detect disease.

• Japan leads the world in the use of MRI technology. The United States is second.

• Low-tech treatments such as childhood vaccinations can also have a major impact on health.

• The United States lags several other developed countries in immunizing our children.

Sources: Organisation for Economic Co-operation and Development, “OECD Health Data 2008”, June 2008 and “OECD Working Papers No. 29, Health Quality Indicators Report”, 2006 Data Collection Update Report, 2007.

Healthcare Quality




Hospital Admission Rate for Uncontrolled Diabetes (per 100,000 population)

0 50 100 150 200 250 300 350 400

Australia

Austria

Canada

Czech Republic

Finland

Italy

Japan

Mexico

Norway

Portugal

Spain

Sweden

United States

Percent of Adults Who Reported Access Problems Because of Costs

0%

5%

10%

15%

20%

25%

30%

35%

40%

Netherlands United Kingdom

Canada Germany New Zealand Australia United States

• As noted previously, the U.S. population has a high incidence of diabetes. In spite of this, the United States has a relatively low rate of hospital admissions for uncontrolled diabetes.

• This is because the United States does a better job of treating diabetes after it occurs. This reduces the cost of caring for individual diabetics, but the best way to reduce the overall cost of diabetics is to reduce the incidence of the disease itself.

• Japan’s high rate is consistent with its high rate of hospital admissions in general.

• The high cost of healthcare discourages people from seeking care. Since the cost of care in the United States is higher than other developed countries, the access issues are also greater.

• The bottom chart shows the percentage of adults in each country who did not get care in the past year due to the cost of a doctor visit; skipped a medical test, treatment, or follow-up because of cost; or did not fill a prescription or skipped doses because of cost.

Hospital Admission Rate for Uncontrolled Diabetes (Per 100,000 Population)

Percentage of Adults Who Reported Access Problems Due to Cost

Sources: Organisation for Economic Co-operation and Development, “OECD Working Papers No. 29, Health Quality Indicators Project”, 2006 Data Collection Update Report, 2007 and The Commonwealth Fund, “The Commonwealth Fund National Scorecard on U.S. Health Systems Performance”, 2008.

Healthcare Quality




National Health Expenditures




$0

$500

$1,000

$1,500

$2,000

$2,500

1980 1990 1993 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

NH

E (

in b

illio

ns)

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

NH

E a

s a

% o

f G

DP

National Health Expenditures NHE as a % of GDP

Projected National Health Expenditures

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Pro

ject

ed N

HE

(in

bill

ion

s)

0%

5%

10%

15%

20%

25%

NH

E a

s a

% o

f G

DP

National Health Expenditures NHE as a % of GDP

• During the 1980s, national health expenditures (NHE) grew much faster than the U.S. economy, increasing from 8.8 percent of gross domestic product (GDP) in 1980 to 12 percent of GDP in 1990.

• During the 1990s, health expenditures grew at about the same rate as the U.S. economy.

• Costs increased significantly as a percentage of GDP between 2000 and 2007. Health expenditures reached 16 percent of GDP in 2007.

• The Centers for Medicare and Medicaid Services (CMS) projects that health expenditures will almost double by 2017, grow faster than the U.S. economy, exceed $4 trillion, and equal almost 20 percent of GDP.

• Increases in health expenditures of the magnitude projected are expected to increase pressure for cost containment, especially from employers and federal and state governments.

• Pressure to reduce costs should lead to new benefit plan designs and changes in who bears the cost.

Sources: Centers for Medicare and Medicaid Services, “National Health Expenditures, 2007,” 2009; and “National Health Care Expenditures Projections 2007–2017,” 2008.


Projected National Health Expenditures





Projected per Capita Health Expenditures

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 20172006 Per Capita Healthcare Expenditures

$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000

Austria

Belgium

Canada

France

Germany

Italy

Netherlands

Portugal

Spain

Sweden

Switzerland

United Kingdom

Unites States

• CMS estimates that per capita healthcare costs will almost double from $7,400 in 2007 to more than $13,000 in 2017.

• If this happens, the premium for family health maintenance organization (HMO) coverage could exceed $25,000 per year. This amount would be reduced by any increases in deductibles, co-payments, or other reductions in coverage.

• U.S. per capita healthcare costs are the highest in the world, by far.

• Recent research to determine why the United States has such high healthcare costs compared with other developed countries concluded that the difference

is due to industry structure, higher utilization, and higher prices in the United States.

• There is a strong correlation between per capita GDP and per capita healthcare costs. However, costs in the United States are higher than expected even considering our high per capita GDP.

Sources: Centers for Medicare and Medicaid Services, “National Health Care Expenditures Projections: 2007–2017,” 2008; The Commonwealth Fund based on Organisation for Economic Co-operation and Development, “OECD Health Data 2006,” June 2006; and McKinsey & Company, “Accounting for the Cost of U.S. Health Care – a new look at why Americans spend more,” December 2008.

Projected per Capita Health Expenditures

2006 Per Capita Health Expenditures




2006 Healthcare Costs as a % of GDP

0% 2% 4% 6% 8% 10% 12% 14% 16%

Austria

Belgium

Canada

France

Germany

Italy

Netherlands

Portugal

Spain

Sweden

Switzerland

United Kingdom

Unites States

Per Capita Healthcare Expenditures by Source

$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000

Australia

Canada

France

Germany

Japan

Netherlands

New Zealand

OECD Median

United Kingdom

United States

Government Expenditures Consumer Out-of-pocket Expenditures Private Insurance Expenditures

Per Capita Expenditures by Source

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Australia

Canada

France

Germany

Japan

Netherlands

New Zealand

OECD Median

United Kingdom

United States

Government Expenditures Consumer Out-of-pocket Expenditures Private Insurance Expenditures

• In 2006, U.S. health expenditures exceeded 15 percent of GDP, far exceeding the expenditure levels of other developed countries.

• Most other developed countries have government-sponsored national health plans that limit expenditures in the government budgetary process. To limit expenditures, government health plans sometimes limit the availability of expensive procedures or require long waits to receive them.

• A common misconception is that government-sponsored national health plans are totally funded by the government. However, as shown in the charts, each country has some level of private (usually insurance) and out-of-pocket spending.

• In the United States, government funding pays for about 47 percent of total healthcare costs. The remaining 53 percent is paid by health insurers or directly by the consumer.

• Government programs in the United States generally pay healthcare costs for the poor, elderly, disabled, and government employees.

• In other countries, the government generally pays some costs for each citizen. However, in these countries, private and consumer expenditures cover from 15 percent to almost 40 percent of healthcare costs.

2006 Health Costs as a Percentage of GDP

Per Capita Healthcare Expenditures by Source

Sources: Organisation for Economic Co-operation and Development, “OECD Health Data 2008,” June 2008 and The Commonwealth Fund based on Organisation for Economic Co-operation and Development, “OECD Health Data 2006,” June 2006.

Percentage of Per Capita Healthcare Expenditures by Source





Per Capita Out-of-Pocket Payments for Personal Healthcare

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

1970 1980 1990 1999 2000 2001 2002 2003 2004 2005 2006 2007

Hospital Professional Nursing/Home Health

Prescription Drugs Other Medical Products Other Costs

NHE by Type (in billions)

$0

$500

$1,000

$1,500

$2,000

$2,500

1980 1990 2000 2007

Other Costs

Other Medical Products

Prescription Drugs

Nursing/Home Health

Professional

Hospital

NHE by Type

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1980 1990 2000 2007

• Per capita out-of-pocket expenditures for healthcare in the United States have increased dramatically over time.

Source: Centers for Medicare and Medicaid Services, “National Health Expenditures, 2007”, 2009.

Per Capita Out-of-pocket Payments for Personal Healthcare

• Hospital and professional costs are the largest components of NHE, each accounting for more than 30 percent of total costs.

• Hospital costs have decreased significantly as a percentage of NHE since 1980.

• The decrease in hospital costs as a percentage of NHE has been offset by growth in physician and prescription drug costs.

Source: Centers for Medicare and Medicaid Services, “National Health Expenditures, 2007”, 2009.

National Health Expenditures by Type (In Billions)

Percentage of National Health Expenditures by Type




Changes in NHE Components

2003

2004

2005

2006

2007


0%

2%

4%

6%

8%

10%

12%

Hospital Professional NursingHome/ Home Health

Prescription Drugs

Other MedicalProducts

Total NHE

1970

1980

1990

2000

2007

NHE by Payor

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Consumer Private Insurance

Other Private Medicare Medicaid Other Public


NHE by Payor

• NHE generally increased at a declining rate between 2003 and 2007 following a period of rapid increases.

• The rate of increase in 2008 is expected to be about the same as in 2007.

• The rate of increase in prescription drug costs has decreased dramatically since earlier in the decade.

• Prescription drug cost increases were down in 2007 as increased use of generic drugs was able to offset the cost of new drugs and increased utilization.

• Although hospital and professional costs are increasing at a lower rate than drugs, their impact on NHE is greater because they constitute a larger portion of the total.

• The consumers’ share of NHE declined significantly between 1970 and 2007.

• The decline in the consumer share of NHE represents insurance and government program benefit increases, partially offset by increased co-payments and deductibles.

• At the same time, per capita expenditures have increased significantly. This increase has been partially concealed from consumers, since the share they pay has declined.

Source: Centers for Medicare and Medicaid Services, “National Health Expenditures, 2007,” 2009.


NHE by Payor





The Consumer Perspective



Percentage saying each was a "serious problem"

0% 5% 10% 15% 20% 25% 30% 35% 40%

Problems paying for gas

Problems getting a good-paying jobor a raise in pay

Problems paying for healthinsurance

Problems paying for food

Problems with credit card debt orother personal debt

Losing money in the stock market

Problems paying your mortgage

instead of taking a new job for fearinstead of taking a new job for fear

How worried are you about the following things...?

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Having to pay more for your healthcare or health insurance

Not being able to afford the healthcare services you think you need

Your health plan being moreconcerned about saving money

than about what treatment is best for you

Not being able to afford theprescription drugs you need

The quality of health care is getting worse

Losing your health insurance coverage

Having to stay in your current job instead of taking a new job

for fear of losing health benefits

Very worried

Somewhat worried

Not too worried

Not at all worried

• The weak state of the economy has consumers worried.

• Among the most serious concerns is consumers’ ability to pay for health insurance.

• When asked questions about specific healthcare concerns, consumers said they are very worried about their ability to afford health services and health insurance.

• Some consumers are also worried that the quality of healthcare services is declining.

Sources: Kaiser Family Foundation, “Kaiser Health Tracking Poll: Election 2008,” August 2008 , and “Health Security Watch,” October 2007.

Percentage of Consumers Saying Each Was a Serious Problem

How worried are you about the following things?




Percentage of Firms Offering Coverage

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

3-9 Workers

10-24 Workers

25-49 Workers

50-199 Workers

200 or More Workers

Total

2000

2008

Percentage of Employees Covered by Firms Offering Coverage

0%

10%

20%

30%

40%

50%

60%

70%

80%

Small Firms Large Firms All Firms

2004

2005

2006

2007

2008

• Most working Americans receive health insurance coverage as a benefit from their employers.

• However, employee coverage varies widely depending on the number of individuals an employer employs.

• Almost all employers with more than 200 employees offer health coverage, but smaller employers are far less likely to offer coverage.

• Even when firms offer health coverage, not all employees are covered. New employees are often not eligible until they have been employed for a specified period of time. In addition, part-time workers often do not qualify for coverage.

• Some eligible employees do not elect to be covered either because of the cost or the fact that they have other coverage.

• As a result, only about 2/3 of employees working for employers that offer coverage are covered. This percentage has been declining during the past five years.

Source: Kaiser Family Foundation and Health Research and Educational Trust, “Employer Health Benefits, 2008 Annual Survey,” 2008.

Percentage of Firms Offering Coverage

Percentage of Employees Covered by Firms Offering Coverage




Premium Increases

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1989 1993 1996 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Health Premiums Workers' Earnings General Inflation (CPI)

Percentage of Health Costs Paid Out-of-pocket vs. Percentage of GDP Spent on Personal Healthcare

Ou

t-o

f-p

ock

et P

erce

nta

ge

Per

son

al H

ealt

h C

ost

s as

a P

erce

nta

ge

of

GD

P

Out-of-pocket Percentage Personal Health Costs as a Percentage of GDP

1960 1970 1980 1990 2000 20070%

10%

20%

30%

40%

50%

60%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Premium Increases

Percentage of Health Costs Paid Out-of-Pocket vs. Percentage of GDP Spent on Personal Healthcare

• Health plan premium increases have generally been higher than increases in the Consumer Price Index (CPI), often significantly higher. The same is true when premium increases are compared with worker earnings.

• The only exception was in the mid-1990s, when price competition among health plans kept premium increases low. Some markets even experienced premium decreases.

• The rate of increase in health plan premiums has declined since 2003 after several years of increases. Even though the rate of increase in premiums is declining, it is still higher than general inflation and wage increases.

• Premium increases in excess of wage increases cause healthcare costs to increase as a percentage of total

employment costs, which concerns employers. It also limits the employees’ ability to pay their share of the cost.

• Since 1960, the consumers’ share of healthcare costs has declined dramatically, while costs have increased.

• The reduction in the consumer share of costs has made consumers less aware of actual cost increases.

• It will be very difficult to control future costs unless consumers are more aware of the cost of the healthcare services they receive and are motivated to manage that cost.

Sources: Kaiser Family Foundation and Health Research & Educational Trust, “Employer Health Benefits, 2008 Annual Survey,” 2008, and Centers for Medicare and Medicaid Services, “National Health Expenditure Accounts, 2007 Highlights,” 2009.





Consumer Out-of-pocket Payments (in billions)

$0

$50

$100

$150

$200

$250

$300

1970 1980 1990 2000 2001 2002 2003 2004 2005 2006 2007

Percentage of Premium Paid by Employee

0%

5%

10%

15%

20%

25%

30%

Single Coverage Family Coverage

2004 2005 2006 2007 2008

• American workers are increasingly concerned about healthcare costs, since a portion of employer health plan cost increases is passed on to employees.

• Consumer payments for healthcare have increased dramatically over the years. This was primarily the result of increased premiums, co-payments, and deductibles in employer-sponsored health plans.

• While the percentage of health insurance premiums paid by employers has remained relatively stable during the past few years, actual amounts paid have increased along with premiums.

• Increases in employee premiums, deductibles, and co-payments are meeting with increased employee resistance.

Sources: Centers for Medicare and Medicaid Services, “National Health Expenditures, 2007,” 2009, and the Kaiser Family Foundation and Health Research and Educational Trust, “Employer Health Benefits—2008 Annual Survey,” 2008.

Consumer Out-of-Pocket Payments (in Billions)

Percentage of Premium Paid by Employees





Average Pharmacy Co-payments

Percentage of Firms Over 200 Workers That Offer Retiree Health Benefits

• Co-payments for prescription drugs have also increased. In addition, most health plans have implemented tiered pharmacy plans to provide incentives for the use of generic and lower-cost branded drugs.

• A relatively recent phenomenon is the addition of a fourth tier to prescription drug plans requiring large co-payments for high-priced specialty drugs.

• In addition to aggressively managing healthcare costs for their employees, employers have also reduced or eliminated health benefits for their retirees.

• Retiree health plans for those over 65 cover costs not paid by Medicare. The Medicare Prescription Drug Improvement and Modernization Act of 2003 provides incentives for employers to continue to provide retiree health coverage. Time will tell if these incentives will be sufficient to stop the decline in retiree health coverage.

Sources: Kaiser Family Foundation and Health Research and Educational Trust, “Employer Health Benefits—2007 Annual Survey,” and “Employee Benefits—2008 Annual Survey,” 2007 and 2008.


Average Copayment for Prescription Drugs

$0

$10

$20

$30

$40

$50

$60

$70

$80

Generic Preferred Nonpreferred Fourth-Tier

2001

2002

2003

2004

2005

2006

2007

Percentage of Firms with Over 200 Workers That Offer Retiree Health Benefits

0%

10%

20%

30%

40%

50%

60%

70%

1988 1991 1993 1995 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008



Most Important Issues in the Presidential Election

0%

10%

20%

30%

40%

50%

60%

Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08Economy Iraq Gas Prices Healthcare

Which of the following issues is most important in your vote for president?

0% 10% 20% 30% 40% 50% 60%

Making healthcare and healthinsurance more affordable

Expanding health insurancecoverage for the uninsured

Improving the quality of care andreducing medical errors

Reducing spending on governmentprograms like Medicare/Medicaid

Reducing the total amount thecountry spends on healthcare

Most Important Issues in the Presidential Election

Which one of the following is the most important healthcare issue in your vote for president?

• In 2008, the pollsters were very active. Healthcare has been a top political issue for a number of years, and both presidential candidates included healthcare reform plans in their agendas.

• While healthcare has long been a top political issue, its relative importance varies. The importance of healthcare as a campaign issue in 2008 declined as the economy weakened and gas prices rose.

• When asked to rate the relative importance of various healthcare issues, the increasing cost of healthcare was viewed as much more important than obtaining increased coverage for the uninsured and improving the quality of care.

• Healthcare reform is a top priority of the Obama administration. Skeptics think that foreign policy and economic issues will overshadow reform efforts for at least the next few years. Time will tell.

Sources Kaiser Family Foundation, “Kaiser Health Tracking Poll: Election 2008,” August 2008.




2008 Average Annual Premium by Plan Type

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

HMO PPO POS HDHP All Plans

Single Coverage

Family Coverage

Average Annual Premiums

$0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000

2004

2005

2006

2007

2008

Single Coverage Family Coverage

• The cost of health insurance is a major concern of American business leaders.

• In surveys conducted by the National Federation of Independent Business, the cost of health insurance has been the number one business problem since 1986.

• Employers generally enroll their employees in one of four types of commercial health plans —health maintenance organization (HMO), preferred provider organization (PPO), point of sale plan (POS), or high-deductible health plan (HDHP).

• Health premium costs for 2008 exceeded $4,000 for single coverage and $12,000 for family coverage.

• In 2008, health premium increases averaged about 5 percent.

• These premium levels are net of plan deductibles, co-payments, and coinsurance.

2008 Average Annual Premium by Plan Type

Average Annual Premiums

2008 Small Business Problems and Priorities

1. Cost of health insurance6. Unreasonable government regulation

2. Fuel costs 7. State taxes on business income

3. Federal taxes on business income 8. Cost of supplies/inventory

4. Property taxes 9. Electricity costs

5. Tax complexity 10. Workers’ compensation costs

Sources: National Federation of Independent Business, “Small Business Problems and Priorities,” June 2008, and Kaiser Family Foundation and Health Research and Educational Trust, “Employer Health Benefits—2008 Annual Survey,” 2008.





Factors Leading to Increases in Health Insurance Premiums

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Higher Insurance Company Profits

Higher Spending for Hospital Care

Higher Spending forPhysician Services

Higher Spending forPrescription Drugs

Better Medical Technology

Aging Population

Workers Using More ServicesBecause They only Pay a Small

Portion of Costs

A Lot

Somewhat

Not Too Much

Not At All

Don't Know

Likelihood of Plan Changes

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Increase Employee Payments for Insurance

Increase Employee Payments for Drugs

Increase Deductibles

Increase Copays or Coinsurance

Increase Tiered Cost Sharing

Restrict Eligibility for Coverage

Drop Coverage

Offer HDHP Very Likely

Somewhat Likely

Not Too Likely

Not At All Likely

Don't Know

Among Firms Offering Health Benefits, Percentage That Offer an HDHP

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

3-199 Workers 200-999 Workers 1,000 or More Workers

• When asked what factors cause premium increases, employers express a broad consensus that all major cost components contribute. They also believe that the aging population and better medical technology are significant cost drivers.

• Seventy percent of employers believe that health insurance premium increases are caused, in part, by employees’ use of more services because they pay only a small portion of the cost.

• Few employers expect to drop coverage for their employees or to restrict eligibility for coverage.

• Most large employers also expect to shift more healthcare cost to employees.

• High-deductible health plans have become more popular in recent years. Such plans provide financial incentives to employees to manage the cost of their healthcare.

• High-deductible health plans may also offer tax advantages to employees enrolled in them.

Source: Kaiser Family Foundation and Health Research and Educational Trust, “Employer Health Benefits—2007 Annual Survey,” 2007


Factors Leading to Increases in Health Insurance Premiums

Likelihood of Plan Changes

Among Firms Offering Health Benefits, Percentage That Offer an HDHP



Percentage of Covered Workers in Partially or Completely Self-Insured Plans

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

3-199 Workers 200-999 Workers

1,000-4,999 Workers

5,000 or More Workers

All Firms

2000

2008

2008

Percentage of Workers in Partially or Completely Self-Funded Plans

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Conventional HMO PPO POS HDHP

2000

Average Percentage Increase in Health Insurance Premiums by Funding Arrangement

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2000 2001 2002 2003 2004 2005 2006 2007Fully Insured Self-Funded

• One technique used by employers to manage employee healthcare costs is to self-insure their health plans. This enables employers to better define the benefits they provide and to avoid certain state regulatory requirements.

• Self-insured benefits are typically administered by commercial health plans. The employers pay the healthcare costs directly, and pay the plan administrator a fee for their services.

• Employers are more likely to self-insure when their costs are more predictable. This often prevents small employers from self-insuring due to the volatility of their employee healthcare costs.

• Large employers are increasingly electing to self-insure.

Percentage of Covered Workers in Partially or Completely Self-Insured Plans

Percentage of Workers in Partially or Completely Self-Funded Plans

Average Percentage Increase in Health Insurance Premiums by Funding Arrangement • Employers that self-insure their health benefits generally save money over time compared to purchasing insurance. They save the portion of the premium that compensates the insurer for assuming risk, and they avoid some of the volatility of premium increases.

Sources: Kaiser Family Foundation and Health Research and Educational Trust, “Employees Health Benefits 2007 and 2008 Annual Surveys,” 2007 and 2008.




Reasons For Not Offering Health Benefits

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

High Premiums

Firm is Too Small

Employees Covered Elsewhere

Obtain Good Employees Without Offering a Health Plan

Firm Too Newly Established

High Turnover

Administrative Hassle

Firm Has Seriously Ill Employee

Very Important

Somewhat Important

Not Too Important

Not At All Important

Don't Know

% of Large Employers Prefunding Retiree Healthcare Obligations

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Total 1,000-4,999 Employees

5,000-9,999 Employees

10,000-19,999 Employees

20,000+ Employees

Use of Financial Incentives to Reward Healthy Behavior

0% 10% 20% 30% 40% 50% 60%

Full coverage for preventive services

Completion of health risk appraisal

Participation in health improvementor disease management program

Participation in smoking cessation program

Participation in a weightmanagement program

Management of cholesterol level orblood pressure

Completion of consumer education module

Maintaining a personal health record

Reasons for Not Offering Health Benefits

• Unlike pension plans, retiree health benefit plans are not required to be funded while employees are working. In addition, there is no tax benefit for doing so.

• Generally accepted accounting principles require that the expense of providing retiree health benefits be accrued over the working careers of the employees. However, most employers do not fund these obligations as they accrue.

• Only 25 percent of employers with more than 1,000 employees fund postretirement benefits before they are paid.

• Employers are increasingly offering their employees financial incentives to reward healthy behavior.

• More than half of the employers surveyed provided incentives for the completion of a health risk appraisal and provided full coverage for preventative services.

Percentage of Large Employers Prefunding Retiree Healthcare Obligations

Use of Financial Incentives to Reward Healthy Behavior

• As noted above, some employers do not provide health benefits for their employees. When asked why, the overwhelming response is the high premiums.

• Other reasons include that the firm is too young or too small to afford health benefits and that their employees are covered elsewhere.

Sources: Kaiser Family Foundation and Hewitt Associates, “Retiree Health Benefits Examined,” December 2006, and Watson Wyatt, “Employer Use of Financial Incentives to Reward Healthy Behavior Expected to Surge,” May 2008.




The Health Plan Perspective



Concentration of Healthcare Spending in the U.S. Population

0%

20%

40%

60%

80%

100%

120%

Top 1% Top 5% Top 10% Top 20% Top 50% Bottom 50%

Perc

enta

ge

of T

ota

l Sp

end

ing

Concentration of U.S. Healthcare Spending by Age

0%

5%

10%

15%

20%

25%

30%

35%

18 and Under 19-34 35-44 45-54 55-64 65-79 80 and Over

Per

cen

tag

e o

f T

ota

l Sp

end

ing

Concentration of U.S. Healthcare Spending

Cost by Age

• Health plans, whether they be insured, self-insured by employers, or government plans, pay most of the healthcare costs in the United States. There are certain facts about these costs that are fundamental to the health plan perspective.

• First, healthcare costs are not evenly distributed among the population. The top 1 percent of the population incurs 22 percent of total healthcare costs, and the top 5 percent incurs almost half.

The bottom 50 percent of the population incurs only 3 percent of total healthcare costs.

• Second, the same people are not in the top 1 percent year after year. Only about one-quarter of the top 1 percent are in the top 1 percent in the following year.

• Third, healthcare costs increase dramatically with age. People over 65 consume more than 40 percent of total healthcare costs.

Source: Agency for Healthcare Research and Quality, “High Concentration of U.S. Healthcare Expenditures,” June 2006.





Percentage of Medicare Spending by Number of Chronic Conditions

5+ Chronic Conditions 66%

No Chronic Conditions 1%

1-2 Chronic Conditions 10%

4 Chronic Conditions 13%

3 Chronic Conditions 10%

Distribution of Chronic Conditons by Age

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

18-34 35-54 55-64 65 and Older

No Chronic Conditions 1 Chronic Condition 2+ Chronic Conditions

• Fourth, healthcare costs increase dramatically when a person has chronic conditions, like diabetes or heart disease. These conditions are costly to treat, very costly when not treated, and are often incurable.

• Two-thirds of Medicare spending is devoted to caring for people with five or more chronic conditions. Only 1 percent of Medicare spending is devoted to people with no chronic conditions.

• The likelihood of having a chronic disease increases with age.

Percentage of Medicare Spending by Number of Chronic Conditions

Distribution of Chronic Conditions by Age

Sources: The Commonwealth Fund, G. Anderson and J. Horvath, “Chronic Conditions: Making the Case for Ongoing Care,” Baltimore MD Partnership for Solutions, December 2002 and Agency for Healthcare Research and Quality, “Health Care Expenditures for Adults with Chronic Conditions, 2005,” Based on Medical Expenditures Panel Survey data, May 2008.




The Five Most Costly Conditions as a Percentage of NHE

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Heart Conditions Cancer Trauma Mental Disorders

Pulmonary Conditions

Commercial Health Plan Enrollment

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

1988

1993

1998

2003

2005

2007

Indemnity HMO PPO POS HDHP

• Individual chronic conditions are very costly. In combination, the cost multiplies.

• More than 8 percent of total healthcare costs are spent treating heart disease.

• The cost of treating the five top conditions is about 1/3 of total healthcare costs.

• Since 1988, there has been a dramatic shift away from traditional indemnity insurance to managed care plans.

• Managed care plans include health maintenance organizations (HMOs),

preferred provider organizations (PPOs), and point-of-service (POS) plans. HMOs and POS plans are generally more restrictive than PPOs.

• HMO, PPO, and POS plans grew rapidly in the 1990s as employers focused on controlling rapidly increasing healthcare costs.

• More recently, HMO and POS enrollment has declined, and PPOs have increased market share as consumers became disenchanted with the restrictions imposed by HMO and POS plans.

• High-deductible health plans are a new plan design focused on getting individuals to manage their own healthcare costs.

• The increased popularity of less strict managed care plans has probably contributed to the large increase in healthcare costs since the late 1990s.

The Five Most Costly Conditions as a Percentage of NHE

Commercial Health Plan Enrollment

Sources: Agency for Healthcare Research and Quality, “The High Concentration of U.S. Health Care Expenditures,” June 2006, and Kaiser Family Foundation and Health Research and Educational Trust, “Employer Health Benefits—2007 Annual Survey,” 2007.





Total HMO Enrollment and Growth Rate

55

60

65

70

75

80

2000 2001 2002 2003 2004 2005 2006

En

rollm

ent

in M

illio

ns

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Gro

wth

Rat

e

Total HMO Enrollment Growth Rate

Membership by Type - December 31, 2007

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Aetna

AMERIG

ROUP

Coventry

Health

Net

Health

Spring

Human

a

Kaiser

United

Well

Point

Commercial Medicare Medicaid TRICARE Nonrisk

• HMO enrollment increased during 2005 and 2006 primarily as a result of growth in Medicare Advantage plans.

• The mix of membership varies widely among major managed care companies.

• With the exception of AMERIGROUP, which focuses on Medicaid, and HealthSpring, which focuses on Medicare, all major companies focus on commercial business, including nonrisk business, which is mostly commercial.

• HealthSpring focuses primarily on Medicare Advantage plans. Most of the companies offer Medicare plans, but none focus on them to the degree that HealthSpring does.

• TRICARE is a federal program covering military dependents and retirees. Humana and Health Net participate in the TRICARE program. A significant portion of the TRICARE membership for these two companies is included in the nonrisk category.

• Medicaid managed care membership has increased dramatically over the past few years as states embraced managed care as a means of controlling the cost of healthcare. While most major managed care companies participate in the Medicaid program, AMERIGROUP focuses primarily on Medicaid.

Sources: HealthLeaders–InterStudy, “The InterStudy Competitive Edge, Part II: HMO Industry Report,” March 2007, and KPMG, “2008 Managed Care Industry Report,” 2008.

HMO Enrollment and Growth Rate

Membership by Type – December 31, 2007




Healthcare Premiums (in Millions)

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

Aetna

AMERIG

ROUP

Coventry

Health

Net

Health

Spring

Human

a

Kaiser

United

Well

Point

2003 2004 2005 2006 2007

Medical Cost Ratio

70%

75%

85%

90%

95%

80%

Aetna

AMERIG

ROUP

Coventry

Health

Net

Health

Spring

Human

a

Kaiser

United

Well

Point

2003 2004 2005 2006 2007

Health Care Premiums (in Millions)

Medical Cost Ratio

• Most major managed care companies have increased premium revenue significantly during the last five years as premium increases and membership growth offset any membership losses or transfers of risk business to nonrisk plans.

• The large 2006 premium growth for United and WellPoint includes the first full year of revenue from their 2005 acquisitions.

• Humana’s 2006 and 2007 premium growth is largely due to the addition of new Medicare members.

• The medical cost ratio (MCR) is the ratio of medical costs to premiums.

• Most companies had relatively volatile MCRs during the period.

• In 2007, some companies reduced their MCRs from 2006 levels, and some went up. The general trend is toward higher MCRs.

• Kaiser has higher MCRs than the other companies do, reflecting its not-for-profit status and its integrated delivery operating model. The integrated delivery model results in higher medical ratios and lower administrative cost ratios than commercial plans, since medical management and certain other costs are included in medical rather than administrative costs.

Sources: KPMG, “2008 Managed Care Industry Report,” 2008.





Median HMO Operating Margin

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Percentage of NHE Spent on Health Insurance Administration

0%

1%

2%

3%

4%

5%

6%

7%

8%

Finland

Japan

Australia

United

KingdomAustr

ia

Canada

Netherla

nds

Switzerla

nd

Germany

France

United

States

• The profitability of HMOs has varied widely over time.

• In the late 1990s, the median HMO lost money as some traditional cost control measures were dismantled and medical costs increased. After 2000, profitability increased.

• In 2008, the profitability of large managed care companies declined as medical costs increased faster than premiums and investment results declined.

• The cost of insurance administration in the United States is higher than in other developed countries.

• Other developed countries generally have government sponsored health plans that use standard benefit structures and simplified payment systems rather than the complex systems used in the United States.

Sources: American Hospital Association, “Trendwatch Chartbook 2008,” 2008, and The Commonwealth Fund, “The Commonwealth Fund National Scorecard on U.S. Health System Performance,” 2008.

Median HMO Operating Margin

Percentage of NHE Spent on Health Insurance Administration




The Hospital Perspective



Top Issues Confronting Hospitals

2005 2006 2007

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Finan

cial

Challe

nges

Care

for t

he

Uninsu

red

Physici

an/

Hospita

l Rel

atio

nsQual

ity

Perso

nnel

Shortages

Patie

nt

Safet

y

Govern

men

t

Man

dates

Patie

nt

Satisf

actio

n

Capac

ity

2008

Top Hospital Financial Challenges

0%

10%

20%

30%

40%

50%

60%

70%

80%

IncreasingCosts

Medicaid Bad Debts Medicare InadequateFunding For

CapitalImprovements

Managed CarePayments

Revenue CycleManagement

EmergencyDepartment

OtherCommercialInsurance

• Hospital management is a complex business with diverse and dynamic challenges.

• These charts are based on annual surveys of hospital CEOs. The percentages indicate the proportion of CEOs including each issue as one of their top three issues.

• The most pressing issues by far are financial challenges. These challenges include maintaining profitable operations and obtaining capital to maintain or expand operations.

• Care for the uninsured, quality, and patient safety are of increasing importance. Quality and patient safety were combined in the 2008 survey. They were listed separately in previous years.Concern about personnel shortages has declined since 2005.

• The chart at right indicates the percentage of CEOs identifying the matter as one of their top three financial challenges.

• The recent “credit crisis” has had a significant impact on hospitals. A November 2008 survey indicated that many hospitals suffered a variety of adverse consequences.

Sources: American College of Healthcare Executives, “Top Issues Confronting Hospitals: 2007,” January 2008; Modern Healthcare, “New Year’s Stress – ACHE survey shows finances lead executives’ concerns”, January 12, 2009; and American Hospital Association, “AHA Rapid Response Survey, The Economic Crisis Impact on Hospitals,” November 2008.

Top Issues Confronting Hospitals

Top Hospital Financial Challenges


33%

12%

11%

11%

10%

7%

4%

Increased interest expense forvariable rate bonds

Increased collateral requirements

Inability to issue bonds

Difficulty refinancing auction rate debt

Inability to roll over or renew credit

Acceleration of debt

Inability to withdraw funds held byfinancial institutions

Percentage of Hospitals Reporting Effects of Credit Crisis




Hospital Ownership - 2006

Investor-Owned 18%

State/Local Government 23%

Not-for-profit 59%

Number of Hospitals

All Hospitals Urban Hospitals Rural Hospitals

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

1985 1990 1995 2000 2001 2002 2003 2004 2005 2006

0

1

2

3

4

5

1985 1990 1995 2000 2001 2002 2003 2004 2005 2006


• Unlike other segments of the healthcare industry, most hospitals are generally not-for-profit or government entities.

• The for-profit hospital sector has grown significantly since 1980, but represented only 18 percent of hospital beds in 2006.

• The number of U.S. hospitals declined from approximately 5,800 in 1985 to less than 5,000 in 2006. This decline was due to decreased demand for inpatient services and to hospital consolidation.

• The number of hospitals has been relatively stable since 2000.

Sources: Modern Healthcare, “By the Numbers, 2007–8 Edition,” December 2007, and American Hospital Association, “AHA Trendwatch Chartbook, 2008,” 2008.

Hospital Ownership

Number of Hospitals

Hospital Beds per 1,000 Population

Hospital Beds per 1,000 Population

• Due to decreasing inpatient volume, the number of beds per 1,000 persons in the population decreased significantly, driven by industry consolidation, rationalization of services to reduce hospital costs, and hospital closings.

• The decline in beds per 1,000 has slowed since 2000.

• There is wide variation in the number of beds per 1,000 among developed countries. Turkey and Mexico have fewer than the average reflecting their lower GDP per capita.

• Japan’s high number of beds per 1,000 is likely related to differences in medical practice and the aging of its population.

Sources: American Hospital Association, “TrendWatch Chartbook 2008,” 2008, and Organisation for Economic Co-operation and Development, “OECD Health Data, 2008,” June 2008.


Hospital Beds per 1000 Population

0 2 4 6 8 10 12 14 16

Australia

Austria

Belgium

Canada

France

Germany

Greece

Japan

Mexico

Netherlands

Spain

Switzerland

Turkey

UK

USA



Inp

atie

nt A

dm

issi

on

s p

er 1

00

0 Po

pu

lati

on

Len

gth

of

Sta

y (i

n d

ays)

Inpatient Admissions per 1000 Population Length of Stay

5

5.5

6

6.5

7

7.5

8

100

110

120

130

140

150

160

170

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Adjusted Cost Per Hospital Day

$0 $500 $1,000 $1,500 $2,000 $2,500

United States

France

Australia

Canada

Germany

Japan

Hospital Revenue and Expenses per Admission

Inpatient Utilization

• Hospital revenue per patient admitted rose dramatically during the 1980s but leveled off during the 1990s. Revenue per patient has risen in recent years.

• Expenses rose in a similar manner. Margins were small during the entire period, but they have increased since 2000.

• During the same period, the number of people admitted to the hospital per 1,000 persons in the population and the average length of stay for those admitted decreased by more than 25 percent.

• Decreasing patient volume and the shift toward the outpatient setting put tremendous pressure on the ability of hospitals to maintain their inpatient revenue stream.

Source: American Hospital Association, “TrendWatch Chartbook 2008,” 2008.


• The cost of keeping a patient in the hospital for a day varies from less than $500 in Japan to more than $2,000 per day in the United States. This is consistent with the United States having the highest healthcare costs in the world.

Adjusted Cost Per Hospital Day

Sources: American Hospital Association, “AHA Trendwatch Chartbook 2008,” 2008, and The Commonwealth Fund, calculated from OECD Data 2006, Organisation for Economic Co-operation and Development, “OECD Health Data 2008,” June 2008.

Operating Revenue per Adjusted Admission Expenses per Adjusted Admission

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Hospital revenue and expenses per admission



Hospital Days Per Capita

0.0 0.5 1.0 1.5 2.0 2.5

United States

France

Australia

Canada

Germany

Japan

Average Length of Stay

0 5 10 15 20 25 30 35 40

United States

France

Australia

Canada

Germany

Japan

Inpatient RevenueOutpatient Revenue

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001 2002

2003

2004 2005

2006

• The hospital days per capita for the same countries also shows wide variation, but there appears to be an inverse relationship. Countries with high costs per day tend to have low hospital days per capita.

• The variation in hospital days per capita suggests that U.S. hospital patients may be sicker than those in other countries.

• The average length of a hospital stay also varies widely among developed countries.

• The United States, which has the highest cost per day, compensates for this by having the shortest length of stay. Japan has the lowest cost per day and the longest length of stay.

• To better serve their patients and to maintain revenue growth, hospitals have dramatically increased outpatient services by adding clinics, ambulatory surgery centers, and home health operations. This move to outpatient care was made possible by advances in clinical practices and medical technology.

Hospital Days Per Capita

Average Length of Stay

Hospital Revenue by Source

Sources: The Commonwealth Fund, calculated from OECD Data 2006, Organisation for Economic Co-operation and Development, “OECD Health Data 2008,” June 2008; and American Hospital Association, “AHA Trendwatch Chartbook 2008,” 2008.




0

500

1000

1500

2000

2500

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

1995 2000 2001 2002 2003 2004 2005

0%

10%

20%

30%

40%

50%

60%

70%

80%

Home Health Skilled Nursing Facility

Other Long-term Care

Assisted Living Hospice Meals on Wheels

2006

Outpatient Hospital Visits Per 1,000 Population

Other Services Offered by Hospitals

• The number of outpatient hospital visits has more than doubled in the past 20 years. This has helped to offset the decline in inpatient stays.

• Hospitals offer a wide variety of outpatient services, and the mix has changed over time.

• The percentage of hospitals offering home health and skilled nursing facilities has declined since 1995.

• The number of hospitals offering other long-term care, assisted living, and hospice services increased during the same period.

Source: American Hospital Association, “AHA Trendwatch Chartbook 2008,” 2008.





70%

80%

90%

100%

110%

120%

130%

140%

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Hospital Payment-to-Cost Ratios

Medicare Medicaid Private Payors

Median Hospital Patient Revenue Sources

Managed Care 23%

Medicare 41%

Medicaid 10%

Commercial 5%

Blue Cross 14%

Self Pay & Other 7%

Hospital Payment-to-Cost Ratios

• The mix of payment sources is a critical element in the financial results of a hospital.

• When margins are calculated based on who pays the bill, it is apparent that private payors (primarily health plans) have consistently made up for underpayments by the Medicare and Medicaid programs.

• Medicare business has been profitable for a few years out of the past 25 but is trending downward. Medicaid business has been consistently unprofitable for hospitals.

• Medicare and Medicaid provide about half of the revenue for the median hospital. Most of the rest is paid by health plans. Less than 7 percent of revenue is paid by the patients themselves.

Sources: American Hospital Association, “AHA Trendwatch Chartbook 2008,” 2008, and Standard and Poor’s, “U.S. Not-for-Profit Health Care Systems 2008 Median Ratios Suggest Growing Financial Pressures,” August 2008.

Median Hospital Patient Revenue Sources




Hospital Non-capital Costs

Utilities 1.3%

Wages & Benefits 59.8%

Other Products 14.5%

Professional Fees 5.4%

Prescription Drugs 6.3%

Liability Insurance 2.0%

Other: Labor Intensive 4.0%

Other: Non-labor Intensive 6.7%

0.060

0.065

0.070

0.075

0.080

0.085

1985 1990 1995 2000 2001 2002 2003 2004 2005 2006

• Hospitals are labor intensive businesses. Almost 60 percent of noncapital costs are incurred for employee wages and benefits.

• Since personnel costs are the largest expense of most hospitals, they are closely managed.

• The number of hospital employees per 1,000 admissions increased rapidly between 1985 and 1990. It has declined steadily since then despite the increasing complexity of healthcare delivery.

• The shortage of qualified people in the job market probably contributed to the decline, as did attempts by hospitals to increase employee productivity and reduce costs.

Hospital Noncapital Costs

Hospital Employees Per Adjusted Admission

Source: American Hospital Association, “AHA Trendwatch Chartbook 2008,” 2008.





Aggregate Hospital Margins

0%

1%

2%

3%

4%

5%

6%

7%

1980 1985 1990 1995 2000 2001 2002 2003 2004 2005 2006

Percentage of Hospitals with Negative Margins

0%

5%

10%

15%

20%

25%

30%

35%

1985 1990 1995 2000 2001 2002 2003 2004 2005

Uncompensated Hospital Care

$0

$5

$10

$15

$20

$25

$30

$35

1980 1985 1990 1995 2000 2001 2002 2003 2004 2005 2006

Co

st o

f U

nco

mp

ensa

ted

Car

e (i

n b

illio

ns)

0%

1%

2%

3%

4%

5%

6%

7%

% o

f T

ota

l Ho

spit

al E

xpen

ses

Cost of Uncompensated Care % of Total Expenses

• Hospital margins vary from year to year based on levels of reimbursement by government programs and health insurers as well as the effectiveness of cost management by hospitals.

• Hospital profitability improved between 2001 and 2006.

• In spite of the improving overall trend, many hospitals lose money each year.

• Since 2000, at least 25 percent of hospitals had negative margins each year.

• The current financial crisis is expected to have a significant negative impact on hospital profitability in 2008 and 2009.

• One reason that hospitals sometimes have difficulty making money is the growth in care they provide for free. Nationally, hospitals provided more than $31 billion of uncompensated care in 2006. This amounted to 5.7 percent of total hospital expenses.

Aggregate Hospital Margins

Percentage of Hospitals with Negative Margins

Sources: Modern Healthcare, “By the Numbers, 2007–2008 Edition,” based on American Hospital Association data, December 2007, and American Hospital Association, “Uncompensated Hospital Care Fact Sheet,” October 2007.

Uncompensated Hospital Care





The Nursing Home Perspective



Nursing Home Ownership

Government 6%

For Profit 66%

Not-for-Profit 28%

Certified Nursing Homes

12,000

13,000

14,000

15,000

16,000

17,000

18,000

2000 2001 2002 2003 2004 2005 2006 2007

Nursing Home Patients

1,200,000

1,250,000

1,300,000

1,350,000

1,400,000

1,450,000

1,500,000

2000 2001 2002 2003 2004 2005 2006 2007


• Unlike hospitals, nursing homes are mostly for-profit entities. However, about one-third of nursing homes are not-for-profit or government owned.

• The number of certified nursing homes declined by about 6 percent between 2000 and 2007.

• The reduction in the number of nursing homes corresponds to a reduction in patients requiring care, the bankruptcy of a number of large nursing home operators, and a shift of nursing care to other settings.

Nursing Home Ownership

Certified Nursing Homes

Nursing Home Patients

Nursing Home Occupancy Rate

• The number of patients in nursing homes also declined between 2000 and 2007.

• The number of nursing home beds decreased faster than the number of patients, resulting in an increased occupancy rate for nursing homes.

• A large portion of nursing home operating costs is fixed. Therefore, maintaining high occupancy rates is key to profitability.

Sources: American Health Care Association, “The State Long-Term Care Sector 2004: Characteristics, Utilization and Government Funding,” March 2005, and “Trends in Nursing Facility Characteristics,” December 2007.


Nursing Home Occupancy Rate

85%

86%

87%

88%

89%

90%

2000 2001 2002 2003 2004 2005 2006 2007



Nursing Home Patients by Payor

Medicare 12%

Medicaid 66%

Other 22%

Medicare 15%

Medicaid 47%

Out-of-pocket 30%

Private Insurance 8%

2004 Nursing Home Revenue and Cost Per Inpatient Day

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

Net Inpatient Revenue Inpatient Routine Costs Ancillary Services Costs General Services Costs

• Most nursing home patients are covered by government programs.

• About two-thirds of nursing home patients are covered by Medicaid. Medicaid covers nursing home care for the poor and disabled. There are no time limits on Medicaid coverage.

• Medicare provides limited nursing home benefits for the elderly and longer periods for patients with certain disabilities.

• Even though two-thirds of nursing home patients are covered by Medicaid, that program contributes less than half of nursing home revenue.

Nursing Home Patients by Payor

Sources of Payment for Nursing Home Care

2004 Nursing Home Revenue and Cost Per Inpatient Day• The cost per inpatient day for a nursing

home is much less than for a hospital.

• In spite of this cost advantage, nursing homes are low-margin businesses.

Sources: American Health Care Association, “The State Long-Term Care Sector 2004: Characteristics, Utilization, and Government Funding,” March 2005, and “The State Long-Term Care Sector 2005: Characteristics, Utilization, and Government Funding,” August 2006.





The Physician Perspective



0

0.5

1

1.5

2

2.5

3

1980 1985 1990 1995 2000 2001 2002 2003 2004 2005

2005 Physicians per 1000 Population

0 1 2 3 4 5

Australia

Austria

Belgium

Canada

France

Germany

Greece

Japan

Mexico

Netherlands

Spain

Switzerland

Turkey

UK

USA

Physicians Per 1,000 Population

2005 Physicians Per 1,000 Population

• The number of physicians in the United States has steadily increased. In fact, the number of physicians per 1,000 population increased from 1.9 to 2.6 between 1980 and 2004.

• The rate of increase appears to have leveled off since 2000.

• Many other countries have more physicians per 1,000 than the United States. Most European countries have more than 3 physicians per 1,000 population.

Sources: American Hospital Association “AHA Trendwatch Chartbook 2008,“ 2008 and Organisation for Economic Co-operation and Development, “OECD Health Data 2008,” June 2008.





Per Capita Spending on Physician Visits

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

Japan France Canada OECD Median Australia United States

Annual Physician Visits per Capita

0

2

4

6

8

10

12

14

16

Japan France Canada OECD Median

Australia Netherlands UnitedKingdom

United States

New Zealand

• The amount spent on physician visits is fairly consistent among developed countries, except for the United States.

• The United States spends much more than other countries. This is similar to other healthcare spending categories.

• However, U.S. citizens do not go to their physicians as often as citizens of many other countries, especially Japan.

Sources: The Commonwealth Fund, calculated from “OECD Health Data 2006,” 2008.

Per Capita Spending on Physician Visits

Annual Physician Visits Per Capita




Physician Specialization

0%

20%

40%

60%

80%

100%

1949 1960 1970 1980 1990 2000 2005

Primary Care Specialists

Anesthesiologist

Cardiology (noninvasive)

Emergency Medicine

General Surgery

Hospitalist

Internal Medicine

Obstetrics/Gynecology

Orthopedic Surgery

Neurology

Oncology

Pediatrics

$50,000 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000 $400,000 $450,000 $500,000 $0

• Since 1949, the number of primary care physicians in the United States has declined from 59 percent of total physicians to 37 percent while the number of physicians increased by more than 300 percent.

• Primary care physicians include general and family practitioners, internists, obstetricians, gynecologists, and pediatricians.

• The increased use of specialists is often cited as a cause of high healthcare spending in the United States.

• This assertion is supported by the fact that specialists are more highly compensated than primary care physicians.

Sources: Centers for Disease Control and Prevention, “Health, United States, 2007,” December 2007, and Modern Healthcare, “By the Numbers, 2008–2009 Edition,” based on MGMA data, December 2008.

Physician Specialization

Physician Compensation by Specialty




Distribution of Physicians by Practice Size

Primary Care Physicians Earnings by Practice Size

• Sixty percent of U.S. physicians are either in solo practice or in groups of four physicians or fewer.

• Large group practices often provide operating efficiencies since they are able to afford more administrative support, including better IT systems.

• Physicians in larger group practices tend to have higher earnings than solo practitioners and those in small groups.

Sources: The Commonwealth Fund, based on A. Gauthier, S.C. Schoenbaum, and J. Weinbaum, “Toward a Higher Performance Health System for the United States,” March 2006 and Medical Economics,” 2008 Exclusive Survey – Good News for Primary Care Income,” August 2008.


Distribution of Physicians by Practice Size

Solo Practice 34%

2 to 4 MDs 26%

5 to 9 MDs 16%

10 to 49 MDs 17%

50 to 99 MDs 3%

100+ MDs 4%

Primary Care Physician Earnings by Practice Size

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

Solo Practice 2 MDs 3-10 MDs 11-25 MDs 26-50 MDs 50+ MDs



Potential Efficiency Savings with 90% Adoption of EMR Systems (in Billions)

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

Outpatient Inpatient Total

Average per Year Year 15

Use of Electronic Medical Records

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Netherlands New Zealand United Kingdom

Australia Germany United States Canada

Percent using EMR Percent using 7 or more of 14 EMR functions

Potential Efficiency Savings with 90 Percent Adoption of EMR System (in Billions)

Use of Electronic Medical Records

• The use of electronic medical records (EMR) has the potential to increase medical quality while reducing healthcare costs.

• A study by RAND Corp. indicates that healthcare costs could be reduced by an average of $40 billion per year if 90 percent of healthcare providers used EMR, and the benefits would increase over time.

• In spite of these benefits, the United States lags many countries in the use of EMRs.

• Countries with high EMR usage tend to have government programs subsidizing their use.

Sources: Modern Healthcare, “IT Savings are Sky High: study based on data from RAND Corp.,” September 19, 2005 and The Commonwealth Fund, “2006 Commonwealth Fund International Health Policy Survey of Primary Care Physicians in Seven Nations,” 2006.




Physician Usage of Electronic Medical Records

0%

5%

10%

15%

20%

25%

30%

35%

2001 2002 2003 2004 2005 2006

• The use of EMRs by U.S. physicians has increased significantly over the past few years, but there is still a long way to go.

• More physicians working for hospitals or in large physician groups have access to EMRs than physicians working in solo practices or small groups.

• The cost of medical malpractice insurance is a significant expense for most U.S. physicians. Premiums have risen rapidly during the past few years causing significant problems in a number of states.

• Although malpractice premiums have increased significantly during the past few years, malpractice insurance has not been a profitable line of business for most insurers. In fact, the U.S. insurance industry lost money on malpractice insurance every year between 1998 and 2004.

• High malpractice premiums have caused some physicians to move or limit their practices. In other cases, physicians perform tests and other procedures on their patients solely to avoid potential liability issues.

Physician Usage of Electronic Medical Records

America’s Medical Liability Crisis Map

Sources: Modern Healthcare, “By the Numbers, 2007–2008 Edition,” December 2007, American Medical Association, and A.M. Best Company, “The Guide to Understanding the Insurance Industry – 2008–2009,” 2008.




The Pharmaceutical Company Perspective



Home Countries of Major Pharmaceutical Companies

US, 17

Japan, 14

Germany, 6

Other European, 5

Switzerland, 3

UK, 3

Israel, 1

100+ MDs 4%

Per Capita Drug Spending in Developed Countries

$0

$100

$200

$300

$400

$500

$600

$700

$800

United States

France Canada Germany Japan Australia OECD Median

Netherlands

Home Countries of Major Pharmaceutical Companies

Per Capita Drug Spending in Developed Countries

• The pharmaceutical segment is the only truly global portion of the healthcare industry.

• Most of the top pharmaceutical companies are headquartered in the United States, Europe, and Japan.

• The United States leads other developed countries in per capita drug spending.

Sources: KPMG International “KPMG Disclosures Handbook – Volume 1, Risk and Disclosure in the Pharmaceutical Industry, 2007–2008,” 2008; and Organisation for Economic Co-operation and Development, “OECD Health Data 2008,” June 2008.





Prescription Drug Spending in Nominal $ Prescription Drug Spending in Real $

$0

$50

$100

$150

$200

$250

1980 1985 1990 1995 2000 2001 2002 2003 2004 2005 2006

National Prescription Drug Expenditures by Payer

0%

10%

20%

30%

40%

50%

60%

1990 1992 1994 1996 1998 2000 2001 2002 2003 2004 2005 2006

Public Funds Private Health Insurance Consumer Out-of-pocket

• As with other components of healthcare spending, drug spending in the United States is growing rapidly both in nominal and real terms.

• During the 1990s, there was a shift in prescription drug expenditures from consumers to private insurers and government programs.

• This shift was due primarily to increased drug benefits offered in insurance programs.

• The Medicare Prescription Drug Improvement and Modernization Act of 2003 provided drug coverage for seniors beginning in 2006.

• The implementation of the Medicare drug benefit accounts for the large shift among payors in 2006.


Sources: American Hospital Association, “AHA Trendwatch Chartbook 2008,” 2008 and Kaiser Family Foundation, “Prescription Drug Trends,” based on CMS National Health Expenditure data, September 2008.

Prescription Drug Spending (in Billions)

National Prescription Drug Expenditures by Payer




Payment for Major Health Services for Privately Insured Persons, 2004

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Prescription Drugs Hospital Care Physician Services

Private Health Insurance Out-of-pocket Other

Brand and Generic Shares of Prescriptions Filled

0%

10%

20%

30%

40%

50%

60%

70%

80%

2000 2001 2002 2003 2004 2005 2006 2007Branded Products Generic Products

Payment for Major Health Services for Privately Insured Persons, 2004

Brand and Generic Shares of Prescriptions Filled

• Even though consumer payments as a percentage of total drug spending have declined significantly over the years, consumers are very aware of higher drug costs.

• This may be due to the fact that consumers still pay a larger share of drug costs than they pay for other major health services.

• One factor that has moderated drug cost increases is the dramatic increase in the use of generic drugs over the past several years.

• Since 2000, the proportion of prescriptions for generics has increased from less than half to more than two-thirds of total prescriptions.

• Generic drugs become available after the patents on branded drugs expire. When generics become available, they generally sell for significantly lower prices than the branded drugs they replace.

Sources: PhRMA, based on National Health Expenditures data, 2006, and PhRMA analysis of National Prescription Audit data from IMS Health, through third quarter of 2007, 2008.





Components of 2007 Non-specialty Drug Cost Increase

Cost per Prescription 43%

New Drugs 2%

Utilization 55%

Central Nervous System 24%

Cardiovascular 22%

Gastroenterology 9%

Respiratory & Allergy 9%

Endocrine & Diabetes 8%

Anti-infectives 7%

Musculoskeletal & Rheumatology 5%

Other Categories 16%

• In 2007, benefit costs for a major pharmacy benefit management company for nonspecialty drugs increased by 4.7 percent.

• Less than half of the increase was due to price increases for individual drugs. More than half of the increase was due to an increased number of prescriptions. A small amount was due to new, more expensive drugs.

• The majority of drug spending is related to relatively few drug classes.

• Drugs for cardiovascular disease and the central nervous system including pain and mental health medications, make up almost half of total drug costs.

• A large proportion of drug costs is to treat people with chronic diseases.

Components of 2007 Nonspecialty Drug Cost Increase

Top Therapeutic Categories Contributing to 2007 Drug Spending


Sources: Express Scripts, “2007 Drug Trend Report,” April 2008 and Medco, “2008 Drug Trend Report,” 2008.




Components of 2007 Specialty Drug Cost Increase

Cost per Prescription 35%

New Drugs 5%

Utilization 60%

Top Therapuetic Classes Contributing to 2007 Specialty Drug Spending

Autoimmune Conditions 27%

Multiple Sclerosis 17%

Cancer 17%

Growth Hormone 6%

Anticoagulation 5%

Anemia 4%

Other 20%

Hepatitis C 4%

• In 2007, specialty drug costs increased at a 14 percent rate. Specialty drugs are costly and are often developed by biotech companies.

• As is the case with nonspecialty drugs, increased utilization is the largest cause of the 2007 increase in the cost of specialty drugs.

• Specialty drugs are usually disease specific.

• Treatments for autoimmune disease, multiple sclerosis, and cancer account for more than 60 percent of specialty drug spending.

Sources: Express Scripts, “2007 Drug Trend Report,” April 2008 and Medco, “2008 Drug Trend Report,” 2008.

Components of 2007 Specialty Drug Cost Increase

Top Therapeutic Categories Contributing to 2007 Specialty Drug Spending





Cost To Develop a New Drug (in millions)

1975 1987 2000 2006$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

The Research and Development Process: Long, Complex, and Costly

Cost to Develop a New Drug (in Millions)

• The process of discovering and developing new drugs is time consuming and expensive. Five thousand to 10 thousand compounds must be evaluated for each new drug approved by the FDA, a process that can take more than 10 years.

• The FDA must approve a potential new drug at two points in the development process. The investigational new drug application (IND) must be approved before clinical trials begin, and the new drug application (NDA) must be approved before a new drug may be manufactured and sold.

• A great deal of the cost of operating a pharmaceutical company and even more of the risk is involved in discovering and developing new drugs.

• The cost of developing a new drug has increased dramatically from just over $100 million in 1975 to more than $1.3 billion in 2006.

Source: PhRMA, “Profile 2008 – Pharmaceutical Industry,” 2008.





Present Value of Revenue from Drugs Introduced Between 1990 and 1994 by Decile (in millions of 2000 dollars)

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

1 2 3 4 5 6 7 8 9 10

Third Quarter 2007 Sales of Drugs Going Off Patent by Year of Expiration (in millions)

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

2010 2011 2012

Advair/Seretide Diovan/CoDiovanLipitor Plavix Seroquel SingulairZyprexa

• High R&D costs must be recovered before individual drugs can be profitable.

• A study of drugs introduced in the early 1990s indicated that only 3 out of 10 new drugs earned enough revenue to recover their $500 million of development cost.

• The life of a branded drug is limited by the life of the patents that protect it from generic competition.

• When patents expire, the revenue received for a branded drug decreases dramatically and rapidly.

• The patents on seven drugs with quarterly revenue in excess of one billion dollars each will expire between 2010 and 2012.

• Drug companies are working diligently to develop and acquire new drugs to replace the revenue lost due to patent expirations.

Sources: H. Grabowski, J. Vernon, and J. DiMasi, “Returns on Research and Development for 1990s New Drug Introductions,” Pharmacoeconomics, December 2003, and KPMG analysis of Wall Street Journal Online Data, 2008.

Present Value of Revenue from Drugs Introduced Between 1990 and 1994 by Decile (in Millions of 2,000 Dollars)

Third Quarter 2007 Sales of Drugs Going Off Patent by Year of Expiration (in Millions)




0

100

200

300

400

500

600

Cancer Infections Central NervousSystem

Cardio-vascular

Pain/Inflammation

Respiratory Diabetes and

Metabolic

Blood Disorders

Gastro-intestinal

Derma-tological

Percentage of Workers Facing Different Cost-Sharing Formulas for Prescription Drugs

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

2000

2001

2002

2003

2004

2005

2006

2007

Four-tier Three-tier Two-tier Fixed Payment Other

Number of Drugs in Development in the Top Ten Therapeutic Areas

Percentage of Workers Facing Different Cost-Sharing Formulas for Prescription Drugs

• More than 1,700 new drugs are in development in the top 10 therapeutic areas.

• Many of these drugs will likely prove to be ineffective or dangerous to patients and will not be approved by the FDA.

• Pharmacy benefits have received great attention in recent years due to significant cost increases.

• One technique to manage pharmacy costs has been to develop tiered pharmacy benefits, with the co-payment increasing with the cost of the drug purchased.

• Most health plans now use a three-tier benefit design. Generic drugs have the lowest co-payment, followed by brand-name drugs on the plan’s formulary and brand-name drugs not on the plan’s formulary.

• Recently, a fourth tier has been added to some plans, which requires large co-payments for expensive biotech drugs.

Sources: Medco, “2008 Drug Trend Report,” 2008, and Kaiser Family Foundation and Healthcare Research and Education Trust, “Employer Health Benefits 2007,” 2007.




Government Healthcare Spending (in billions)

Federal Government State & Local Government

$0

$100

$200

$300

$400

$500

$600

$700

$800

1970 1980 1990 1999 2000 2001 2002 2003 2004 2005 2006 2007

Government Healthcare Programs (in billions)

Medicare Medicaid

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

1970 1980 1990 1993 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007


• The government is involved in all aspects of healthcare. It is a payor, provider, regulator, researcher, and employer.

• The government pays for about 47 percent of U.S. healthcare expenditures.

• Medicare is the largest federal government healthcare program and pays the majority of healthcare costs for Americans over age 65.

• Medicaid is a joint federal and state program that covers the poor and the disabled.

• In 2006, Medicare expenditures increased rapidly and Medicaid

expenditures decreased. This was due to the implementation of the Medicare drug benefit and the transfer of the drug cost for people eligible for both programs to Medicare.

• Both Medicare and Medicaid resumed a more normal growth trend in 2007.

• The cost of both the Medicare and Medicaid programs is increasing rapidly, threatening the future viability of the programs as currently designed.

Source: CMS, “National Health Expenditures Accounts – 2007 Highlights,” 2009.

Government Healthcare Spending (in Billions)

Government Healthcare Programs (in Billions)



Medicare Enrollment

Med

icar

e E

nro

llmen

t (i

n m

illio

ns)

Per

cen

tag

e in

Man

aged

Car

e P

lan

s

Medicare Enrollment Percentage in Managed Care Plans

0

5

10

15

20

25

30

35

40

45

50

1990 1995 2000 2001 2002 2003 2004 2005 2006 20070%

5%

10%

15%

20%

25%

Population Over Age 65

0

10

20

30

40

50

60

70

80

90

100

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

Ove

r A

ge

65 (

In M

illio

ns)

0%

5%

10%

15%

20%

25%

% o

f P

op

ula

tio

n

65 Years & Over % of Population

Medicare Enrollment

Population Over Age 65

• Medicare covers people over age 65, people receiving Social Security disability payments, and people with end-stage renal disease.

• Medicare enrollment is largely determined by the number of Americans over age 65. This number has grown slowly in the past, but is expected to grow rapidly in the future as the Baby Boom Generation reaches age 65 and older Americans live longer.

• Federal and state governments have embraced managed care as a means of reducing government healthcare expenditures.

• Medicare managed care plans have never served more than 20 percent of Medicare beneficiaries because traditional Medicare provides good benefits without the restrictions present in managed care plans.

• The reduction in Medicare managed care enrollment between 2000 and 2003 was due to the low premium increases, which caused managed care companies to reduce the areas in which they offered Medicare coverage.

Sources: American Hospital Association, “AHA Trendwatch Chartbook 2008,” 2008 and CMS, “Medicare Enrollment: National Trends 1996–2007,” 2008.




2005 Government Drug Expenditures by Program

Other Public Programs 7%

Medicaid 68%

Medicare 25%

Med

icai

d E

nro

llmen

t (i

n m

illio

ns)

Per

cen

tag

e In

Man

aged

Car

e P

lan

sMedicaid Enrollment Percentage in Managed Care Plans

Medicaid Enrollment

0

10

20

30

40

50

60

70

1990 1995 2000 2001 2002 2003 2004 2005 20060%

10%

20%

30%

40%

50%

60%

70%

Medicaid Enrollees and Expenditures

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Enrollees Expenditures

Children Adults Blind & Disabled Elderly

2005 20062006 Government Drug Expenditures by Program

Other Public Programs 21%

Medicaid 26%

Medicare 53%

Government Drug Expenditures by Program• Medicare began providing prescription drug benefits in 2006.

• The charts compare the percentage of total drug costs paid by various government payors in 2005 versus 2006.

• Medicare’s share of total drug costs increased from 25 percent in 2005 to 53 percent in 2006. This increase was partially offset by a decrease in Medicaid spending from 68 percent in 2005 to 26 percent in 2006.

Source: Kaiser Family Foundation, “Prescription Drug Trends.” September 2008.

Medicaid Enrollment

Medicaid Enrollees and Expenditures

• Medicaid covers poor children and their mothers, the disabled, and the elderly. Most Medicaid expenditures are made on behalf of the disabled and the elderly.

• Medicaid enrollment has increased over time as the number of poor has increased. Medicaid enrollment is also sensitive to general economic conditions such as the level of unemployment.

• A much larger percentage of Medicaid beneficiaries is enrolled in managed care plans than Medicare beneficiaries, due to state mandates.

• Much of Medicaid expenditures for the elderly is for nursing home care, which is only partially covered by Medicare.

Sources: American Hospital Association, “AHA Trendwatch Chartbook 2008,” 2008 and CMS, “An Overview of the U.S. Health Care System Chartbook,” January 2007.





The Uninsured



Health Insurance Coverage (Under Age 65)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1995 2000 2005

Private Insurance Medicaid Other Insurance Uninsured

Number of Nonelderly Uninsured (in millions)

0

5

10

15

20

25

30

35

40

45

50

1994 1995 1996 1997 1998 1999 1999 2000 2001 2002 2003 2004 2004 2005 2006 2007

The Uninsured

Health Insurance Coverage (Under Age 65)

Number of Nonelderly Uninsured (in Millions)

• Approximately 16 percent of the U.S. population under age 65 has no health insurance coverage.

• Although the uninsured are a relatively stable proportion of the nonelderly population, their numbers have increased in recent years.

• The number of uninsured fluctuates with economic conditions. The economic recession, coupled with rapidly increasing costs, could significantly increase the number of uninsured in the future.

• The number of uninsured declined in 2007. However, the number of Medicaid beneficiaries increased by more than the decrease in the uninsured.

Sources: Centers for Disease Control and Prevention, “Health and Prevention,” Health United States, 2007, “December 2007 and Kaiser Family Foundation, The Uninsured: a Primer,” October 2007.



Employment in Uninsured Families

No Workers 19%

1 or More Full-time Workers 69%

Part-time Workers 12%

Insured & Uninsured by Income Level

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Insured Uninsured

<100% FPL 100-199% FPL 200-399% FPL 400+ FPL

• Sixty-nine percent of uninsured families have one or more members with full-time jobs. Only 19 percent of uninsured families have no workers.

• Unemployment appears to contribute to the problem of the uninsured in only a minor way.

• Fifty-seven percent of uninsured families have incomes that are less than 200 percent of the federal poverty level (FPL), or about $43,000 for a family of four. Such families often cannot afford to buy insurance or to pay the employee’s share of the cost of employer-sponsored health plans.

• Fourteen percent of uninsured families have incomes in excess of 400 percent of the FPL, or about $84,000. Many of these families could afford insurance but choose not to participate.

Sources: Kaiser Family Foundation, “Five Basic Facts on the Uninsured,” September 2008, and Centers for Disease Control and Prevention, “Health, United States,” December 2007.

Employment in Uninsured Families

Insured and Uninsured by Income Level

The Uninsured




Insurance Status - 2007

Uninsured during the year 28%

Insured all year/notunderinsured 58%

Insured all year/underinsured 14%

Insured & Uninsured by Age

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Insured Uninsured

Under 18 18-44Years 45-64 Years

Insured and Uninsured by Age

Insurance Status – 2007

• A smaller proportion of the uninsured population are children than in the insured population. This is likely due to coverage provided by the State Children’s Health Insurance Program (SCHIP), a government program to provide coverage to children from low-income families.

• The majority of the uninsured are young adults aged 18 to 44 years.

• Most measures of the uninsured population focus on the number of people who are uninsured at a point in time. A much larger percentage of people lack coverage for a portion of the year.

• Also, 14 percent of the population are insured, but do not have sufficient coverage to be able to afford their share of the costs if they become seriously ill.

• Only 58 percent of the population has coverage that meets their needs.

Sources: Centers for Disease Control and Prevention, “Health, United States, 2007,” December 2007, and The Commonwealth Fund, based on C. Schoen, S.R. Collins, J.L. Krirs, and M.M. Daty, “How Many Uninsured? – Trends Among U.S. Adults, 2003 and 2007,” Health Affairs, June 2008.

The Uninsured



Barriers to Healthcare by Insurance Status

0% 10% 20% 30% 40% 50% 60%

No UsualSource of Care

Postponed SeekingCare Due to Cost

Needed Care but Did Not Get it Due to Cost

Could Not AffordPrescription Drug

Uninsured Medicaid/Other Public Employer/Other Private

Funding for Uncompensated Care (in billions)

Private, $6

Federal Government, $24

State Government, $11

Barriers to Healthcare by Insurance Status

Funding for Uncompensated Care (in Billions)

• Lack of insurance can have a dramatic impact on the quality of healthcare received. Spending on healthcare is much lower for the uninsured than for the insured at all levels of need for care.

• The uninsured typically do not have a personal primary care physician that they go to for care.

• The uninsured also postpone or avoid needed care because they cannot afford the out-of-pocket costs.

• A common misconception is that the uninsured do not get care. Most uninsured get some level of care, but they often get it too little, too late, and in the wrong setting.

• The uninsured only pay for a small portion of the care they receive. A portion of the balance is paid by the government and providers. The rest is paid indirectly by the insured and their insurers.

Source: The Kaiser Family Foundation, “The Uninsured: a Primer,” October 2007.

The Uninsured



Healthcare Reform



Healthcare Reform

In his autobiography, Mark Twain quotes Benjamin Disraeli, the 19th century British prime minister, as saying “There are three kinds of lies: lies, damned lies and statistics”. No one knows whether Disraeli ever uttered the statement, but there is some truth to it.

Having gotten this far in our report, you have reviewed a lot of statistics. While carefully selected statistics can be used to support almost any argument, we have provided an array of data that presents a reasonably complete description of the various segments of the healthcare industry.

Healthcare Cost and Quality

While the introduction of Medicare in 1964 had a huge influence on our healthcare system, there has never been comprehensive healthcare reform in the United States. However, there have been many efforts to reduce the cost and improve the quality of the system on a smaller scale. One thing we have learned in the process is that the approach to reform can significantly affect the outcome. Past efforts that focused primarily on reducing costs without a similar focus on quality generally have failed.

Think about the impact of the Balanced Budget Amendment of 1997 on hospitals and nursing homes. The price cuts forced providers to cut costs dramatically, significantly reduce staffing levels, reduce services and, in some cases, close entire facilities. However, the savings were short-lived, and quality was not improved.

There is increasing evidence that a focus on improving quality by critically evaluating what is done for each patient, by whom it is done, and where it is done, can significantly reduce the cost of treatment. Health issues are detected early, unnecessary services are avoided, medical errors are reduced, costs are lower, and each patient gets what he or she needs. Everybody wins.

The ultimate cost and quality of healthcare services are determined when a physician, in consultation with his or her patient, determines the clinical procedures to be performed and performs those procedures. Payment systems, government regulations, and other influences can affect the decisions made and how they are implemented, but they do not directly influence the outcome. Reform of healthcare delivery, however, has great potential to improve healthcare outcomes in America. The government must help, but the most important improvements are clinical, not legislative or regulatory.

Reform Strategies

Healthcare reform can be either incremental or comprehensive. Incremental reform can be effective if undertaken as part of a long-term plan to achieve comprehensive reform. This is because the components of real reform are interdependent. Universal coverage by itself would be very expensive and might yield only small improvements in quality. However, if universal coverage is combined with improvements in care delivery, the cost of the additional coverage would be mitigated by any savings from care delivery, and quality should improve significantly.

Incremental reform has an advantage of allowing small changes to be evaluated for effectiveness and the overall plan to be adjusted as implementation continues. A disadvantage of incremental change is that it is slow and may be halted before the overall plan is accomplished.

The concept of quick, comprehensive healthcare reform has a certain allure for anyone dissatisfied with the current state of the healthcare system—fix all the problems at once and start reaping all the benefits as soon as possible. However, comprehensive reform requires knowledge of what should be done in detail. The complexity of our healthcare system makes this knowledge difficult or impossible to obtain. Also, implementing comprehensive reform all at once increases the likelihood of unintended consequences that may have to be fixed later.



Implementation Risk

In crafting reform proposals, the risk of a failure in implementation must be assessed up front and managed during the implementation process. Some changes are riskier than others. For example, changing the health insurance market from a group to an individual model is a high-risk change. The existing group market is well established, and it allows employers to efficiently provide health benefits for their employees. The existing individual health insurance market has different underwriting standards, benefit structures, and marketing channels than the group market, and administrative costs are higher than the group market. A dramatic shift in the health insurance market structure would be very complex, and there is a significant risk that the market might not function as intended for an extended period of time.

On the other hand, some changes are lower risk. Expanding the use of evidence-based medicine and electronic medical records are examples. In organizations where evidence-based medicine is uniformly practiced and where electronic medical records are used, significant improvements in both cost and quality have been shown. Making these changes will involve significant implementation costs, but the benefits are clear.

Some Specifics at Issue

• Universal Coverage The need for universal coverage has been debated for decades, but the hope remains unfulfilled. Universal coverage by itself is expensive, with all reasonable cost estimates exceeding $100 billion per year. Most believe that universal coverage is a good idea, but the main obstacle to implementing it is determining how to pay for it.

The uninsured are a heavy burden on the U.S. healthcare system. They often do not receive adequate preventive care, resulting in costly problems later. Healthcare providers struggle to treat the uninsured on a charity basis, and the insured end up funding that care in an involuntary and inefficient way. This increases the overall cost of care and distributes the cost unfairly.

If all Americans were insured and the payments were adequate to provide the needed care, healthcare providers could treat everyone more effectively and efficiently. However, the question of how to pay for the expanded coverage remains unanswered.

Several state and local governments have implemented programs to provide coverage for the uninsured. Many reasons have been cited for this activity, including the absence of comprehensive national healthcare reform. However, there are benefits to testing many approaches before committing to a national solution.

• Evidence-Based Medicine As noted above, evidence-based medicine has been shown to improve both the cost and the quality of care provided. In many cases, we know what the best course of clinical treatment is in a given situation. In others, we don’t.

Numerous studies indicate that the quality of U.S. medical practice is inconsistent. Expanding the use of evidence-based medicine is a likely solution. If every physician knew what the preferred treatments were in the most common clinical situations and delivered them, the cost of care should be reduced and quality increased.

While this is mostly a clinical issue to be dealt with by healthcare providers, there are several ways that government can help. Government agencies could help to develop, review, communicate, and implement clinical best practices. They could also sponsor or conduct research in the most promising areas to develop new best practices and to compare competing practices to determine which is the most effective. Last, government payments to providers for healthcare services could encourage evidence-based treatments.

Healthcare Reform



• Focus on Primary Care and Chronic Disease Preventable and uncontrolled chronic diseases are key drivers of healthcare costs. Primary care physicians are the first line of defense against these diseases. Primary care physicians helping their patients to stop smoking, control their weight, and live healthy lives are an important element in reducing the future incidence of chronic disease. Not all Americans have reliable access to high-quality primary care, but there are efforts underway to ensure expanded access using the medical home and other concepts. Implementing these concepts is a necessary investment to reduce the future healthcare costs associated with chronic disease.

In addition to prevention, investments are needed in properly treating those who already suffer from chronic diseases. Our healthcare system does not consistently diagnose or effectively treat many chronic diseases. This is very costly. The expanded use of preventive care and evidence-based medicine should significantly improve the early detection and effective treatment of chronic diseases.

• Healthcare Information Technology As discussed above, investments in healthcare information technology should yield significant future benefits in both reduced costs and improved quality. The primary efforts in this area have been focused on increasing the use of electronic medical records. Electronic medical records can offer healthcare providers a patient’s complete medical history. This can result in administrative efficiency, as well as avoiding duplicate tests, preventing inappropriate treatments, and reducing medical errors.

• Availability of Healthcare Cost and Quality Data The amount of data about the cost and quality of care provided by healthcare providers is rapidly expanding. This is a good thing. Such data enables consumers to compare various providers and health plans they are considering and to make better decisions as a result. One thing that could improve the current efforts would be to specify a limited number of data points that each provider is asked to provide. Currently, there are a number of organizations developing quality measures, and the proliferation of measures is already a burden for those providers attempting to comply.

• Malpractice Reform The cost of malpractice insurance is a significant expense for healthcare providers. In spite of this, malpractice insurance has historically been much less profitable than other casualty lines, and many insurers have exited the business. The fear of malpractice liability also causes providers to perform tests or other procedures that they would not otherwise perform, a practice known as “defensive medicine”.

The malpractice problem is very complex and should be addressed. The central issue is how to balance the right of an injured patient to recover damages with the desire for quality healthcare at a reasonable cost.

• Developing the Healthcare Workforce of the Future The healthcare workforce has increased dramatically in the past few years. At the same time, there continue to be concerns about future shortages of certain types of employees. Whether they are physicians, nurses, technicians, or other types of employees, future healthcare workers are likely to need different skills than those needed today. Healthcare reform efforts will inevitably result in winners and losers among employee groups. The winners will likely need to be trained to fulfill their new duties, and the losers will need to develop new, marketable skills. As a result, healthcare educators must change their curricula and delivery methods to meet these needs.

Healthcare Reform



• Reducing Healthcare Prices Price cuts are the quickest way to reduce costs, but the savings are often temporary. Considering how the various segments of the healthcare industry have reacted to past pricing pressure provides insight into what might happen if future price reductions are implemented.

Hospitals – Hospitals have generally reacted to past pricing pressure by attempting to reduce costs. Since a hospital’s largest category of cost is employee salaries and benefits, cost reductions generally result in job losses. In extreme situations, services have been reduced and facilities closed.

Physicians – In the past, physicians have reacted to price cuts by increasing volume. They either see more patients and/or perform more procedures on the patients they see. This mitigates the savings from price cuts.

Health Plans – Medical costs make up 80–85 percent of health plan costs. When premiums are reduced, health plans are usually forced to reduce medical costs. They generally first try to revise their contracts with hospitals and physicians to lower costs (see above). Health plans can also reduce the benefits offered by limiting coverage for certain services or increasing member payments for services they receive. In extreme cases, health plans cease offering plans to certain groups or in certain geographies.

Pharmaceutical Companies – Research and marketing costs are the largest expense categories for pharmaceutical companies. Cuts in these areas could reduce the number of new drugs developed and limit the information physicians and consumers receive about proprietary drugs and the diseases they treat.

This analysis provides insight into what the consequences of significant price cuts could be. Cutting hospital prices would likely lead to job cuts and potential access issues if services are reduced. Cutting physician prices may not result in the intended savings. Cutting health plan premiums would likely result in cuts in plan benefits, and cutting pharmaceutical prices could jeopardize new drug development. These consequences must be considered in developing detailed reform proposals. Failing to do so could undermine the intended benefits.

Healthcare Reform

The KPMG Healthcare & Pharmaceutical Institute (HPI) provides an open forum for business leaders from across the industry to share perspectives, gain insight, and develop approaches to help balance risk and controls, and improve performance. Its members receive relevant publications from KPMG, invitations to Webcasts and other events, and access to additional business resources. HPI welcomes new members; to become a member today, please go to: http://www.kpmghealthcarepharmainstitute.com/.

For more information, please contact:


Ed GiniatNational Line of Business Leader – Healthcare & [email protected]

Healthcare

Marc ScherAudit Sector [email protected]

Sam McGarrTax Sector [email protected]

Bill BakerAdvisory Sector [email protected]

Area Leaders – Healthcare

Bill BakerSouthwest Area [email protected]

Jim GallasMidwest Area [email protected]

Mark HigdonMidatlantic Area [email protected]

Steve HuebnerWest Area [email protected]

Joe SaporitoNortheast Area [email protected]

Payor Segment Leader

John FitzgibbonManaged Care Segment [email protected]

Functional Leaders – Healthcare

Bryan JonesKPMG ForensicSM [email protected]

Rick SpeizmanExempt Organization Tax Leader202-533-3084 [email protected]

Pharmaceuticals & Life Sciences

Mark DrozdowskiAudit Sector [email protected]

Frank MatteiTax Sector [email protected]

David BlumbergAdvisory Sector [email protected]

Area Leaders – Pharmaceuticals

Bill BakerSouthwest Area [email protected]

Paulette DeFalcoWest Area [email protected]

Dave SouchikMidatlantic Area [email protected]

Liam WalshMidwest Area [email protected]

Kelly WatsonNortheast Area [email protected]

Functional Leaders – Pharmaceuticals

Robert EspositoTransaction Services [email protected]

Karen HarperKPMG ForensicSM [email protected]


The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

us.kpmg.com/healthcare

Author John Fitzgibbon, National Segment Leader – Healthcare Payors

Contributors Ed Giniat, National Line of Business Leader – Healthcare & Pharmaceuticals

Rick Corcoran, Partner

Mark McComb, Partner

Eric Federing, Executive Director – Business & Public Policy

Merry Newman, Marketing Director – Healthcare & Pharmaceuticals

Leslie Hui, Associate

Sandra Magana, Associate

Design by Rachel Janega

healthcare report 2009

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