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Prospective Payment Assessment Commission Medicare And TheAmerican Health Care System Report WheGdngress June 1995 t Prospective Payment Assessment Commission Medicare AndThe American Health Care System Report TfrfeCbNGRESS June 1995 PROSPECTIVE PAYMENT ASSESSMENT COMMISSION Stuart H. Altman, Ph.D., Chairman Susan S. Bailis Larry L. Mathis* Richard A. Berman* Robert J. Myers James D. Bernstein Donald R. Oder Clay D. Edmands Elliott C. Roberts, Sr.* SpencerJohnson Glenda Rosenbloom William S. Hoffman, Ph.D.* J. Michael Sadaj, M.D. Clark E. Kerr Gerald M. Shea James R. Kimmey, M.D. Roxane B. Spitzer-Lehmann, Ph.D. Judith R. Lave, Ph.D. James R. Tallon Hugh W. Long, Ph.D., J.D. Jae L. Wittlich 'Termexpired 1995 Staffand Consultants Donald A. Young, M.D., Executive Director Laura A. Dummit, Deputy Executive Director Stuart Guterman, Deputy Executive Director John L. Ashby Lynn L. Lewis Shawn M. Bishop Craig K. Lisk Thomas B. Bradley Ann-Marie Lynch Wylene Carlyle Mary Anne Miles Delores J. Curtis Julian H. Pettengill Karen S. Fisher, J.D. Molly Ryan Gina M. Fortuna Michelle A. Rosetta BarbaraJ. Gage, Ph.D. Claire E. Sharda Timothy F. Greene Sarah S. Thomas Joy M. Grossman, Ph.D. Jeannette A. Younes Dana K. Kelley Prospective Payment Assessment Commission 3007thStreet,S.W. Suite301B Washington.D.C. 20024 Tel (202)401-8986 Fax(202)401-8739 June 1, 1995 The Honorable Newt Gingrich Speaker ofthe House United States House ofRepresentatives Washington, D.C. 20515 Dear Mr. Speaker: I am hereby transmitting to the Congress the report Medicare and the American Health Care System. This report has been prepared by the Prospective Payment Assessment Commission as required by Section 1886(e)(2)(C) ofthe Social Security Act. Sincerely, Stuart H. Altman, Ph.D. Chairman Enclosure Prospective Payment Assessment Commission 3007th Street,S.W. Suite30IB Washington, D.C. 20024 Tel (202)401-8986 Fax(202)401-8739 June 1, 1995 The Honorable Al Gore President ofthe Senate United States Senate Washington, D.C. 20510 Dear Mr. President: I am hereby transmitting to the Congress the report Medicare and the American Health Care System. This report has been prepared by the Prospective Payment Assessment Commission as required by Section 1886(e)(2)(C) ofthe Social Security Act. Sincerely, Stuart H. Altman, Ph.D. Chairman Enclosure 1 TABLE OF CONTENTS Chapter Page EXECUTIVE SUMMARY 1 1. ISSUES IN HEALTH CARE FINANCING AND SPENDING 13 Trends inNational Health Care Expenditures 16 Spending by Payment Source 17 Spending by Sector 19 The Impact ofCost Containment 20 Controlling Overall Spending 22 Changing Mix ofPrivate Insurance 23 Medicaid 25 Medicare 25 Distributing the Growing Financial Burden 25 Changing Nature ofFinancial Risk 25 The Growing Uninsured Population 26 Conclusions and Challenges 27 HOSPITAL PAYMENTS, COSTS, AND FINANCIAL CONDITION 2. 3 Medicare Hospital Payments and Costs 34 Medicare Prospective Payment: Effects ofPayment Policy and OtherChanges 35 Cumulative Effect ofPayment Policy Changes 35 Case-Mix Index Change 36 Distribution ofPPS Operating Payments 36 OutlierPayments 39 Indirect Medical Education and Disproportionate Share Payments 39 Trends in PPS Payments andCosts 40 PPS Operating Payments 40 Medicare Operating Costs 41 PPS Operating Margins 43 Distribution ofPPS Margins by Hospital Group 44 Distribution ofPPS Margins Within Hospital Groups 45 Medicare Capital Payment 46 Medicare Direct Graduate Medical Education Payments 47 Medicare Payments forHospital Outpatient Services 48 Medicare Payments forPPS-Excluded Hospitals and Distinct-Part Units 48 Determinants ofHospital Costs 49 Utilization 50 Changes in Hospital Employment 50 Costs ofServices and Supplies 51 Capital Costs and Financing 51 Hospital Productivity Change 52 Changes in Hospital Revenues and Financial Performance 53 Hospital Revenue Growth 53 Trends in Hospital Expenses and Revenues 54 Total Hospital Margins 54 Distribution ofTotal Margins by Hospital Group 55 Distribution ofTotal Margins Within Hospital Groups 56 (v) Cost Shifting 58 PPS and Total Margins 58 Hospital Financial Status and Cost Shifting 59 Conclusions 59 3. HEALTH CARE USE AND INSURANCE COVERAGE 63 Medicare 65 Medicare Enrollees 65 Program Spending and Use ofServices 66 Hospital Inpatient Services 66 Post-Acute Care 67 Ambulatory Services 70 Medicare Managed Care 70 Payment Issues 71 Utilization Issues 72 Managed Care Demonstrations in Medicare 73 Medicaid 73 Expenditure Growth 74 Medicaid Managed Care 74 Private Sector Coverage 75 Insurance Offered by Employers 75 Employers' Cost Controls 76 Use ofManaged Care 76 Differences Between Public and Private Programs 77 The Tools ofManaged Care 77 Benefit Design 78 HMO and PPO Provider Selection 78 HMO and PPO ProviderPayment 79 Utilization Management 80 Quality 81 Variation in Health Care Delivery 81 Private Sector Quality Measurement Initiatives 82 Public SectorQuality Measurement Initiatives 83 Access 84 Nonelderly Insurance Status and Service Use 84 Aged Medicare Beneficiaries' Insurance and Service Use 85 Managed Care and Vulnerable Populations' Access to Care 87 Conclusions 90 4. CHANGING RELATIONSHIPS AMONG PROVIDERS 95 The Health Care Delivery System 97 ProviderOrganization and Integration 98 Influencing Factors 00 1 Local Market Conditions 100 Goals 101 Provider Responses 102 Targeting Geographic Markets 02 1 Securing Market Position 103 Hospital-Physician Relations 104 Regulatory Considerations 106 (vi) Antitrust 106 Physician Self-Referral 07 1 OtherRelated Issues 07 1 Implications ofMarket Change 107 Cost 107 Access 108 Quality 108 5. STATE HEALTH CARE COSTS, PAYMENTS, AND REFORMS Ill State Variation in Health Care Costs 113 The Concept ofStandardized Resource Costs 114 Variation in Standardized Resource Costs PerEnrollee 115 State Comparisons ofStandardized Resource Costs PerEnrollee 115 Resource Costs Relative to Standardized Resource Costs 115 Program Spending Relative to Resource Costs 1 17 Explaining Variation in Standardized Resource Costs 1 18 Health Status and Other Population Characteristics 118 Policy and Health System Factors 19 1 Future Analysis 119 Standardized Resource Costs PerEnrollee by Setting 120 The Contribution ofVolume and Cost PerUnit 121 Volume and CostPerUnit in Facility-Based Settings 123 Utilization Across All Settings 124 Variation in Factors Affecting Standardized Resource Cost Measurement 125 Patient Migration 125 Graduate Medical Education 127 Financial Responsibility ofBeneficiaries and the DoD and VA 128 Input Prices and Beneficiary Age and Sex 130 State Variation in Hospital Payments 130 Variation in Medicare and Medicaid Payments 130 Variation in Cost Shifting 132 Managed Care at the State Level 135 Variation in Managed Care Enrollment 135 Managed Care and Health Care Costs 136 State Regulatory Activities 139 Medicaid Section 1115 Demonstration Programs 140 OtherState Regulatory Activity 141 Conclusions 141 APPENDIXES 147 A.Biographical Sketches ofCommissioners 149 B. Glossary 155 (vii) LIST OF TABLES Page Chapter 1. Issues in Health Care Financing and Spending 1-1 National Health Spending, Selected Years 16 1-2 National Health Spending, by Payment Source, Selected Years (In Billions) 18 1-3 Share ofNational Health Spending, by Payment Source, Selected Years 18 1-4 Change in Real National Health Spending, by Payment Source, 1980-1993 (In Percent) 18 1-5 National Health Spending, by Sector, Selected Years (In Billions) 19 1-6 Share ofNational Health Spending, by Sector, Selected Years (In Percent) 19 1-7 Change in Real National Health Spending, by Sector, 1980-1993 (In Percent) 20 1-8 Hospital Payment to Cost Ratios for Medicare, Medicaid, and Private Payers, 1980-1993 21 1-9 Privately Insured, by Type ofPlan, 1988 and 1993 (In Percent) 23 1-10 Employee Contribution to Indemnity Health Insurance Premiums, 1992 and 1993 (In Percent) 24 1-11 Employee Contribution to Health Insurance Premiums, by Type ofPlan, 1993 24 1-12 Employer-Based Health Insurance Cost, by Type ofPlan, 1992-1994 24 1-13 Nonelderly Population Without Health Insurance, 1990-1994 27 Chapter 2. Hospital Payments, Costs, and Financial Condition 2-1 Hospital Payments by Source, 1983 and 1993 33 2-2 Total Medicare Payments to Hospitals, by Payment Type, Fiscal Year 1995 (In Billions) 34 2-3 Effects ofPPS Update Factors and Other Payment Policy Changes on Per-Case PPS Payments, by Hospital Group, 1984-1995 (In Percent) 37 2-4 Distribution ofPPS Hospitals and Discharges and Estimated Fiscal Year 1995 PPS Operating Payments, by Hospital Group 38 2-5 Annual Change in PPS Operating Costs and Payments, First 10 Years ofPPS (In Percent) 41 2-6 Annual Rate ofChange in PPS Operating Costs PerCase, by Hospital Group, First 10 Years ofPPS (In Percent) 42 PPS Operating Margins, by Hospital Group, First 10 Years ofPPS (In Percent) 43 2-8 Distribution ofPPS Operating Margins and Percentage ofHospitals with Negative Margin, First 10 Years ofPPS (In Percent) 45 2-9 Distribution ofPPS Operating Margins, by Hospital Group, Tenth Year ofPPS (In Percent) 46 2-10 Occupancy Rate, Admissions, Adjusted Admissions, and Outpatient Visits, 1980-1994 (In Percent) 49 2-11 Change in Hospital Employment, 1984-1993 (In Percent) 50 2-12 Change in Hospital and Civilian WorkerCompensation, Fiscal Years 1987-1994 (In Percent) .. 50 2-13 Change in Capital Costs, 1980-1994 (In Percent) 51 2-14 Change in Aggregate Total Factor Productivity and Its Components, 1984-1993 (In Percent).... 53 2-15 Change in Hospital Revenue and Proportion ofRevenue, by Source, 1980-1994 (In Percent) ... 54 2-16 Total Hospital Margins, by Hospital Group, First 10 Years ofPPS (In Percent) 56 2-17 Distribution ofTotal Hospital Margins, by Hospital Group, Tenth Year ofPPS (In Percent) 57 2-18 Gains orLosses by Payer, by Hospital Group, 1993 (In Percent) 60 Chapter3. Health Care Use and Insurance Coverage 3-1 Total Medicare Enrollment, Fiscal Years 1983-1994 (In Millions) 66 3-2 Estimated Growth in Payments for End-Stage Renal Disease Beneficiaries, 1985-1994 66 3-3 Estimated Medicare Program Payments, 1983-1994 67 3-4 Estimated Beneficiary Liabilities, 1985-1994 67 (viii)