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Introduction to State Health Policy: A Seminar for New State Legislators

Slide Presentation by Robert E. Hurley, Ph.D.


On April 1, 2005, Robert E. Hurley made a presentation in a seminar entitled Introduction to State Health Policy.

This is the text version of Dr. Hurley's slide presentation. Select to access the PowerPoint® Slides (362 KB).


Death, Taxes, and Rising Health Care Costs

Robert E. Hurley, Ph.D.
Virginia Commonwealth University

Slide 1

Session Overview

  • Cost pressures.
  • The move to managed care.
  • Early success; later decline.
  • Consequences for States.
  • Private sector responses.
  • Tasks before you.

Slide 2

The Elusive Pursuit of Sustainable, Affordable Health Care Coverage

  • Purchasers of health benefits have long struggled to expand coverage, promote access, and contain costs, simultaneously.
  • Public policymakers have assisted efforts with a variety of policy interventions to try to affect health care markets.
  • States have pursued many strategies:
    • Certificate of need.
    • Rate regulation.
    • Investment in safety net providers.
    • Reform of insurance markets.
    • Mandated benefits and services.
    • Expanded public coverage.
    • Consumer protection initiatives.
  • Cost containment, in particular, has proven to be elusive.

Slide 3

Annual Change in Private Health Spending per Capita, Adjusted for Inflation, 1961 to 2001

On a line graph, the x-axis represents years and the y-axis represents the percent change in spending per capita. Milestones are noted below the x-axis, though the precise years are not specified here: Medicare and Medicaid Implemented in the 1960s, Wage and Price Controls in the 1970s, Voluntary Effort in the 1980s, and Managed Care and Threat of Health Reform in the 1990s.

The percent changes in spending per capita were 3.6 in 1961, 5.1 in 1962, 6.1 in 1963, 9.4 in 1964, 6.0 in 1965, negative 1.6 in 1966, negative 3 in 1967, 7.0 in 1968, 5.7 in 1969, 5.3 in 1970, 3.8 in 1971, 7.3 in 1972, 2.9 in 1973, negative 1.6 in 1974, 0.9 in 1975, 8.4 in 1976, 6.9 in 1977, 1.9 in 1978, 0.2 in 1979, negative 0.7 in 1980, 4.3 in 1981, 6.2 in 1982, 5.9 in 1983, 5.2 in 1984, 5.7 in 1985, 2.8 in 1986, 3.6 in 1987, 9.1 in 1988, 5.7 in 1989, 4.7 in 1990, 1.3 in 1991, 2.0 in 1992, 1.9 in 1993, negative 1.1 in 1994, 0 in 1995, 0.7 in 1996, 2.9 in 1997, 3.4 in 1998, 3.0 in 1999, 4.7 in 2000, and 8.1 in 2001.

Source: Altman and Levitt, 2002.

Slide 4

The U.S. Health System: A Simplified View

At the center of the graphic is an oval labeled Insurance Carrier, Health Plan, or TPA. Three lines extend from the oval. A dotted line connects to a box at the upper left labeled Government 80 Million, a thick line connects to a box at the upper right labeled Employer 170 Million, and another thick line connects to a box below labeled Health Care Providers.

Bullets at the left indicate that the government covers people who are 65 or older, disabled, or receiving a low income. Bullets at the right indicate that the employers cover employees and dependents. Below the oval is a box labeled Health Care Providers. This box is connected by a dotted line to the Government box and by a thin line to the Employer box. Both lines are marked Direct Purchase. Beneath Health Care Providers is a box labeled, Uninsured equals 45 Million.

Slide 5

Employer-Sponsored Indemnity Coverage

A system built around spending someone else's money, and an unmanaged system, at that

  • Employer sponsorship: subsidized premiums and limited cost sharing, health benefits as non-cash compensation shielded from income tax.
  • Indemnity: freedom of choice of providers, providers fees not negotiated, little or no medical management, varied benefit packages.

Slide 6

National Employee Enrollment by Type of Plan

On a bar graph, the y-axis lists years and the x-axis represents the percentage of all covered employees under a given health plan. Indemnity, PPO, POS, and HMO plans are distinguished by the colors of bars collectively stretching from 0 to 100 percent for each year. On this slide, only the bars for 1988 are provided. They indicate 73 percent of covered employees under an indemnity plan, 11 percent under a PPO plan, 0 percent under a POS plan, and 16 percent under an HMO plan.

Source: Gabel et al, KFF, 2002.

Slide 7

Increases in Health Insurance Premiums Compared to Other Indicators, 1988

On a line graph, the x-axis represents all years from 1988 to 2002 and the y-axis represents percent increases in health Insurance premiums, workers' earnings, and overall inflation, each represented by a different line. On this slide, only the increases for 1988 through 1990 are shown, and only those for 1989 are spelled out.

  • Health insurance premiums increased 12 percent in 1988, 18 percent in 1989, and 16 percent in 1990.
  • Workers' earnings increased 3.6 percent in 1988, 4.1 percent in 1989, and 3.9 percent in 1990.
  • Overall inflation increased 4 percent in 1988, 5.1 percent in 1989, and 4.9 percent in 1990.

Source: Gabel et al, KFF, 2002.

Slide 8

Percent of Premium Paid by Covered Workers

On a bar graph, the x-axis lists given years and the y-axis represents the percentage of the premium paid by covered workers. Separate bars represent single coverage and family coverage.

  • Workers under single coverage paid 11 percent in 1988, 20 percent in 1993, and 14 percent in 2000.
  • Workers under family coverage paid 29 percent in 1988, 32 percent in 1993, and 26 percent in 2000.

Source: Gabel et al, 2004.

Slide 9

The Purchaser Revolution

The employers make their move

Slide 10

Purchasers Attempt to Promote Competition via Managed Care

  • Private purchasers embraced managed care to exert more control over health benefits and costs.
  • Managed care organizations, MCOs, charged with being aggressive purchasing agents.
  • MCOs design and develop products to match purchaser, and consumer, demands with provider capacity and capabilities.
  • Products to promote competitive dynamics to curb cost growth, improve efficiency, and reduce cost shifting.

Slide 11

From Indemnity to Managed Care

  • Indemnity: freedom of choice of providers, providers fees not negotiated, little or no medical management, varied benefit packages.

An arrow points down to the next line.

  • Managed care: network-based delivery systems, negotiated payments, medical management, typically richer benefits
    • HMO: narrower networks, aggressive medical management, some risk-based payment.
    • PPO: broader networks, limited medical management, discounted prices payment.
    • POS: HMO with out-of-network options, leaky HMO.

Slide 12

National Employee Enrollment by Type of Plan

On a bar graph, the y-axis lists years and the x-axis represents the percentage of all covered employees under a given health plan. Indemnity, PPO, POS, and HMO plans are distinguished by the colors of bars collectively stretching from 0 to 100 percent for each year. The graph extends to 2003, but percentages after 1999 are not provided.

  • Indemnity plans accounted for 73 percent of covered employees in 1988, 48 percent in 1993, 37 percent in 1994, 29 percent in 1995, 23 percent in 1996, 15 percent in 1997, 14 percent in 1998, and 9 percent in 1999.
  • PPO plans accounted for 11 percent in 1988, 27 percent in 1993, 25 percent in 1994, 29 percent in 1995, 31 percent in 1996, 35 percent in 1997, 34 percent in 1998, and 38 percent in 1999.
  • POS plans accounted for 0 percent in 1988, 7 percent in 1993, 15 percent in 1994, 14 percent in 1995, 19 percent in 1996, 20 percent in 1997, 22 percent in 1998, and 25 percent in 1999.
  • HMO plans accounted for 16 percent in 1988, 19 percent in 1993, 23 percent in 1994, 27 percent in 1995, 27 percent in 1996, 30 percent in 1997, 30 percent in 1998, and 28 percent in 1999.

Source: Gabel et al, KFF, 2002.

Slide 13

Increases in Health Insurance Premiums Compared to Other Indicators, 1988

On a line graph, the x-axis represents all years from 1988 to 2002 and the y-axis represents percent increases in health insurance premiums, workers' earnings, and overall inflation, each represented by a different line. On this slide, only the increases for 1988 thru 1999 are shown, and only those for health insurance premiums in selected years are spelled out.

  • Health insurance premiums increased 18 percent in 1989, 8.5 percent in 1992, 0.8 percent in 1996, and 4.8 percent in 1999.
  • Workers' earning increases ranged from about 2.5 to 4.5 percent.
  • Overall inflation increases ranged from about 1.5 to 5 percent.

Source: Gabel et al, KFF, 2002.

Slide 14

State Governments in 1990s Hitched Their Wagons to Managed Care and Market-based Models

  • State employee health benefits programs came to rely extensively on managed care products.
  • By 2000, more than half, 56 percent, of Medicaid beneficiaries enrolled in managed care arrangements.
  • Many States enrolled SCHIP eligible children in managed care plans.
  • Sustainability of coverage expansions conditioned on expectation of controlling cost increases.
  • States promoted coverage and benefit expansions with various mandates on health plans.

Slide 15

Bringing on a Counterrevolution

  • Suppression of cost-shifting.
  • Consumer and provider backlash.
  • "Uncontrollable cost pressures."
  • Declining public payments.

Slide 16

The Decline of Cost-Shifting, 1990 to 2000: Payments Received as a Percentage of Actual Costs

On a line graph, the x-axis represents all years from 1990 to 2000 and the y-axis represents percentages of actual costs paid by private payers, Medicare, and Medicaid, each represented by a different line. Only the percentages for 1990 and 2000 are spelled out.

  • Private payers paid 127 percent of actual costs in 1990 and 112 percent in 2000.
  • Medicare paid 89 percent in 1990 and 100 percent in 2000.
  • Medicaid paid 80 percent in 1990 and 96 percent in 2000.

Source: MedPAC, 2002.

Slide 17

Median U.S. Physician Income, 1988 to 1998, in Thousands

On a line graph, the x-axis represents all years from 1988 to 1998 and the y-axis represents the median U.S. physician incomes. Nominal and real median incomes are represented by different lines. No medians are spelled out, but both nominal and real median incomes were 120,000 dollars in 1988, rose from 1990 to 1993, dipped from 1993 to 1994, rose from 1994 to 1996, and dipped from 1996 to 1998. From 1988 to 1990, however, the nominal median rose while the real median dipped. By 1998, the nominal was about 160,000 dollars and had reached a high of about 166,000, while the real was at a low of about 117,000 and had reached a high of about 129,000.

Source: Modern Healthcare, 2001.

Slide 18

Percent of Groups with "Unfavorable" Rating

On a bar graph, the y-axis lists groups, among which HMOs is circled, and the x-axis represents the percentages that have an unfavorable rating. Those figures are 71 percent for tobacco companies, 57 percent for HMOs, 57 percent for oil companies, 44 percent for pharmaceutical companies, 28 percent for airlines, 26 percent for banks, 25 percent for hospitals, and 17 percent for doctors.

Source: Kaiser Family Foundation, National Survey of Prescription Drugs, September 2000.

Slide 19

Percent Increase in Prescription Spending Versus Total Health Care Spending, 1990 to 2002

On a bar graph, the x-axis lists all years from 1990 to 2002 and the y-axis represents percent increases in spending. Total health care spending and prescription spending are represented by adjacent bars.

  • Total health care spending increased 10.25 percent in 1990, 9.75 percent in 1991, 9 percent in 1992, 7.25 percent in 1993, 5.5 percent in 1994, 5 percent in 1995, 4.9 percent in 1996, 4.8 percent in 1997, 5 percent in 1998, 5.6 percent in 1999, 5.9 percent in 2000, 6.6 percent in 2001, and 5.5 percent in 2002.
  • Prescription spending increased 12.1 percent in 1990, 12 percent in 1991, 10.5 percent in 1992, 8.75 percent in 1993, 9 percent in 1994, 10.5 percent in 1995, 13.25 percent in 1996, 14 percent in 1997, 15.3 percent in 1998, 16.9 percent in 1999, 17.3 percent in 2000, 15.9 percent in 2001, and 15.3 percent in 2002.
Source: HCFA, CMS.

Slide 20

Medicare Makes Its Move: Balanced Budget Act of 1997

Percent Annual Increase in National Health Expenditures, NHE, versus Private Insurance and Medicare

On a line graph, the x-axis represents given years and the y-axis represents percent annual increases. Underneath the late 1990s is written Balanced Budget Act, which passed in 1997. Different lines represent national health expenditures, private insurance, and Medicare. Each increase is spelled out rounded.

  • National health expenditures increased 12.9 percent in 1980, 10.8 percent in 1988, 9.7 percent in 1993, 5.3 percent in 1997, 5.4 percent in 1998, 5.7 percent in 1999, and 6.9 percent in 2000.
  • Private insurance increased 15.9 percent in 1980, 12.5 percent in 1988, 11.3 percent in 1993, 4.8 percent in 1997, 6.6 percent in 1998, 6.8 percent in 1999, and 8.4 percent in 2000.
  • Medicare increased 17.2 percent in 1980, 11.4 percent in 1988, 10.8 percent in 1993, 8.8 percent in 1997, 0.6 percent in 1998, 1.5 percent in 1999, and 5.6 percent in 2000.

Source: Modern Healthcare, 2001.

Slide 21

Increases in Health Insurance Premiums Compared to Other Indicators, 1988 to 2004

On a line graph, the x-axis represents all years from 1988 to 2004 and the y-axis represents percent increases in health insurance premiums, workers' earnings, and overall inflation, each represented by a different line. Only selected increases are spelled out.

  • Health insurance premiums increased 18 percent in 1989, 8.5 percent in 1992, 0.8 percent in 1996, 4.8 percent in 1999, 8.3 percent in 2000, 13.9 percent in 2003, and 11.2 percent in 2004.
  • Workers' earning increases ranged from about 2 to 4.5 percent and ended at 2.3 percent.
  • Overall inflation increases ranged from about 1.5 to 5 percent and ended at 2.2 percent.

Source: Gabel et al, KFF, 2002.

Slide 22

Contemporary Picture

  • Premium increases remain near or at double digits.
  • Private coverage likely to continue to decline.
  • Private-sector managed care plans lose traction in cost control efforts with providers.
  • Continued increases in major cost drivers:
    • Labor.
    • Technology.
    • Pharmacy.
    • Malpractice.
    • Administrative cost.
  • Public payers continue to shift more pressure to private payers.
  • Increased consumer cost participation inevitable.

Slide 23

Managed Care: Managing to Hold On

  • Broader networks, looser products: PPO.
  • Targeted disease management programs to focus on high-cost users.
  • Incentive-based compensation systems for providers to promote quality.
  • Expanded consumer cost sharing and consumer engagement in choices.
  • Raising premiums faster than costs.

Slide 24

National Employee Enrollment by Type of Plan

On a bar graph, the y-axis lists years and the x-axis represents the percentage of all covered employees under a given health plan. Indemnity, PPO, POS, and HMO plans are distinguished by the colors of bars collectively stretching from 0 to 100 percent for each year.

  • Indemnity plans accounted for 73 percent of covered employees in 1988, 48 percent in 1993, 37 percent in 1994, 29 percent in 1995, 23 percent in 1996, 15 percent in 1997, 14 percent in 1998, 9 percent in 1999, 8 percent in 2000, 7 percent in 2001, 4 percent in 2002, and 5 percent in 2003.
  • PPO plans accounted for 11 percent in 1988, 27 percent in 1993, 25 percent in 1994, 29 percent in 1995, 31 percent in 1996, 35 percent in 1997, 34 percent in 1998, 38 percent in 1999, 41 percent in 2000, 48 percent in 2001, 52 percent in 2002, and 54 percent in 2003.
  • POS plans accounted for 0 percent in 1988, 7 percent in 1993, 15 percent in 1994, 14 percent in 1995, 19 percent in 1996, 20 percent in 1997, 22 percent in 1998, 25 percent in 1999, 22 percent in 2000, 22 percent in 2001, 18 percent in 2002, and 17 percent in 2003.
  • HMO plans accounted for 16 percent in 1988, 19 percent in 1993, 23 percent in 1994, 27 percent in 1995, 27 percent in 1996, 30 percent in 1997, 30 percent in 1998, 28 percent in 1999, 29 percent in 2000, 23 percent in 2001, 26 percent in 2002, and 24 percent in 2003.

Source: Gabel et al, KFF, 2002

Slide 25

Implications for State Policymakers

Sharply rising health care expenses affect:
  • State employee benefits costs.
  • Medicaid and SCHIP expenditures.
  • Coverage expansions, past and future.
  • Financing for safety net providers.
  • Sustainability of private coverage, potentially increasing enrollment in public programs.
  • Demands for both deregulation and new regulation.

Slide 26

Medicaid: The Land Where Managed Care Succeeded, So Far

  • Managed care in Medicaid has fared better than in commercial sector because it is grounded in assumption that resources are limited.
  • States have stayed with HMO product in part because substantial cost-shifting to consumer not an option.
  • Most but not all States generally satisfied with prepaid health plans and ability to hold them accountable for cost and quality standards.
  • Medicaid managed care emerging as lucrative industry for specialized plans; new opportunities to place greater demands on plans.

Slide 27

The Private Sector Response

  • Disenchanted with managed care organizations; growing doubts about their ability to affect health care markets.
  • Belief that expanded coverage and benefits with reduced out-of-pocket costs for employee or consumer is the problem and needs to be reversed.
  • Drumbeat building for a variety of consumer-directed health product, CDHP, designs.
  • Is this inspiration or desperation?

Slide 28

Percentage of Large Employers, more than 200 workers, that are Planning Selected Benefit Changes in Next Year

On a bar graph, the y-axis lists benefit changes and the x-axis represents the percentages of employers with over 200 workers who are likely or not likely to make those changes over the next year. Below the graph reads, Likely equals very or somewhat likely; not equals other. Likely and not likely are distinguished by the colors of bars collectively stretching from 0 to 100 percent for each change.

  • Raise Employee Premium is an 83 percent likely change.
  • Increase Prescription Costs is 55 percent likely.
  • Increase Deductibles is 52 percent likely.
  • Increase Office Copays is 52 percent likely.
  • Reduce Dependent Subsidy is 41 percent likely.
  • Restrict Eligibility is 9 percent likely.

Source: Gabel et al, KFF, 2004

Slide 29

Consumer-Directed Products: A Continuum Perspective

A line with arrow points at both ends runs from the upper left to the lower right of the slide. At basically equidistant points on the line, consumer-directed products are named; these names appear in different colors depending which half of the line is theirs. Starting from the top left, these products are No Premium Contribution and First Dollar Coverage, Premium Contributions and Cost Sharing, Sharply Increased Out-of-Pocket Costs and Benefits Buy-Down, High-Deductible Plan Option with Health Savings or Reimbursement Accounts, Defined Contribution Plans, and Cash in Lieu of Benefits.

Slide 30

Consumer-Directed Health Product: Managed Care Under New Management

The graphic has a box labeled Employer on the left. From that box, an arrow points to the right and diverges into two diagonal arrows, both marked with a dollar sign. The upward arrow points to an oval labeled Employee's Spending Account. The downward arrow points to a hexagon labeled High-Deductible Insurance Policy. At the upper right is a trio of crosses marked Routine or Discretionary Care. At the lower right is one large cross, labeled High-Cost Care. The oval and hexagon each have dotted arrows pointing to both the trio and the large cross.

Slide 31

Policy Concerns with Consumer-Directed Products

  • Information to support consumers remains badly underdeveloped.
  • Potential to lose group-based negotiating clout.
  • Deferred or forgone care could lead to higher costs.
  • Uncompensated care could rise sharply.
  • Healthy likely to opt out of conventional insurance.
  • Less healthy try to maintain comprehensive coverage.
  • Risk-pooling undermined; premiums could soar.
  • Fewer of the less healthy can afford coverage; become uninsured.

Slide 32

The Tasks Before You

  • Sustain past coverage expansions and explore new configurations of public and private arrangements.
  • Review strategies for purchasing care for Medicaid and SCHIP beneficiaries.
  • Revisit benefit designs and delivery system options for State employees.
  • Re-appraise regulatory and other interventions to bolster private insurance markets.
  • Consider consequences of consumer directed products.

Slide 33

Annual Change in Private Health Spending per Capita, Adjusted for Inflation, 1961 to 2001

On a line graph, the x-axis represents years and the y-axis represents the percent change in spending per capita. Milestones are noted below the x-axis, though the precise years are not specified on the graph: Medicare and Medicaid Implemented in the 1960s, Wage and Price Controls in the 1970s, Voluntary Effort in the 1980s, Managed Care and Threat of Health Reform in the 1990s, and a circled What Next? at the right end of the graph. The percent changes in spending per capita were 3.6 in 1961, 5.1 in 1962, 6.1 in 1963, 9.4 in 1964, 6 in 1965, negative 1.6 in 1966, negative 3 in 1967, 7 in 1968, 5.7 in 1969, 5.3 in 1970, 3.8 in 1971, 7.3 in 1972, 2.9 in 1973, negative 1.6 in 1974, 0.9 in 1975, 8.4 in 1976, 6.9 in 1977, 1.9 in 1978, 0.2 in 1979, negative 0.7 in 1980, 4.3 in 1981, 6.2 in 1982, 5.9 in 1983, 5.2 in 1984, 5.7 in 1985, 2.8 in 1986, 3.6 in 1987, 9.1 in 1988, 5.7 in 1989, 4.7 in 1990, 1.3 in 1991, 2 in 1992, 1.9 in 1993, negative 1.1 in 1994, 0 in 1995, 0.7 in 1996, 2.9 in 1997, 3.4 in 1998, 3 in 1999, 4.7 in 2000, and 8.1 in 2001.

Slide 34

Untitled

Winston S. Churchill is set against the backdrop of a Union Jack. Below is a quote attributed to him: "You can always count on the Americans to do the right thing, after exhausting all other alternatives."

Current as of October 2005


Internet Citation:

Death, Taxes, and Rising Health Care Costs. Text version of a slide presentation at Introduction to State Health Policy: A Seminar for New State Legislators. Agency for Healthcare Research and Quality, Rockville, MD. http://www.ahrq.gov/news/ulp/statepolicy/hurleytxt.htm


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