Healthcare Overview

Association of Healthcare Internal Auditors John P. McGuire May 7, 2008

TOPICS

     

Healthcare Economics Payment Systems Profitability Assessment Business Strategies Performance Measures Future Opportunities

Chart 1.4: National Health Expenditures as a Percentage of Gross Domestic Product, 1980 – 2005 (1) 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 Source: Centers for Medicare & Medicaid Services, Office of the Actuary. Data released January 8, 2007.

(1) CMS completed a benchmark revision in 2006, introducing changes in methods, definitions and source data that are applied to the entire time series (back to 1960). For more information on this revision, see http://www.cms.hhs.gov/NationalHealthExpendData/downloads/benchmark.pdf.

=37.4%

Chart 1.5: National Expenditures for Health Services and Supplies (1) Category, 1980 and 2005 (2) by

$234.0B

$1,860.9B

Other (3) , 9.4% Nursing Home Care, 8.1% Other Medical Durables and Non-durables, 5.8% Prescription Drugs, 5.1% Home Health Care, 1.0% Other Professional (4) , 7.2% Physician Services, 20.1% Other (3) , 13.8% Nursing Home Care, 6.5% Other Medical Durables and Non-durables, 3.1% Prescription Drugs, 10.8% Home Health Care, 2.5% Other Professional (4) , 7.7% Physician Services, 22.6% Hospital Care, 43.2% Hospital Care, 32.9% 1980 2005 Source: Centers for Medicare & Medicaid Services, Office of the Actuary. Data released January 8, 2007.

(1) Excludes medical research and medical facilities construction.

(2) CMS completed a benchmark revision in 2006, introducing changes in methods, definitions and source data that are applied to the entire time (3) (4) series (back to 1960). For more information on this revision, see http://www.cms.hhs.gov/NationalHealthExpendData/downloads/benchmark.pdf.

“Other” includes net cost of insurance and administration, government public health activities, and other personal health care.

“Other professional” includes dental and other non-physician professional services.

Four Myths of Health Care Costs

1. Healthcare costs are driven by greed.

2. Healthcare costs are driven by waste.

3. We can’t keep spending more on our health.

4. Other countries get the same for less.

Source: Ira Ellman - Arizona State University

Another viewpoint on the cause of health care costs

    The increase in morbidity rates is due to good medicine.

The expanding concept of health.

The seduction of technology and the deception of marketplace models.

The American Character and appetite.

Source: Willard Gaylin, M.D.

Chart 4.2: Aggregate Total Hospital Margins, (1) Patient Margins, (3) 1991 – 2005 Operating Margins, (2) and 8% 6% 4% 2% 0% -2% -4% -6% Total Margin Operating Margin Patient Margin 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 Source: Avalere Health analysis of American Hospital Association Annual Survey data, 2005, for community hospitals. (1) Total Hospital Margin is calculated as the difference between total net revenue and total expenses divided by total net revenue.

(2) Operating Margin is calculated as the difference between operating revenue and total expenses divided by operating revenue.

(3) Patient Margin is calculated as the difference between net patient revenue and total expenses divided by net patient revenue.

Chart 4.6: Aggregate Hospital Payment-to-Cost Ratios for Private Payers, Medicare, and Medicaid, 1981 – 2005 140% 130% 120% 110% 100% 90% 80% 70% Medicare Private Payer Medicaid (1) 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 Source: Avalere Health analysis of American Hospital Association Annual Survey data, 2005, for community hospitals. (1) Includes Medicaid Disproportionate Share payments.

Medicaid Payment Remains Under Pressure Medicaid Affects Every Hospital

 Reduced benefits/service level caps  Provider payment cuts  Spillover to neighboring hospitals

“If something cannot go on forever, it will stop.”

Herb Stein, economist

Missouri: 90,000 cut Tennessee: 300,000 cut

Employment Drives the Prevalence and Richness of Health Coverage Cause and Effect: US Unemployment Rate vs. the Percentage of the Non-Elderly Population with Employment-Based Coverage

8% 7% Employment Based Coverage 70% 68% Unemployment Rate 6% 66% 64% Non-Elderly With Employment-Based Coverage 5% 62% 4% Unemployment Rate 60% 3% 1987 1990 1993 1996 1999 2002 58%

Secondary Impact: Less competitive labor markets enable firms to shift more health care costs to employees —in the form of premium-sharing, deductibles, copays and coinsurance.

Source: Bureau of Labor Statistics

The Long-Term Trend of Consumers Paying Less Is Reversing Consumer Out-of-Pocket Share of Personal Health Care Spending US Market, 1930-2010

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1930 1940 1950 Medicare and Medicaid 1960 1970

Sources: Milliman & Robertson, Bureau of Labor Statistics, Sg2 forecast

1980 1990 CDHC reverses decline in consumer share of costs 2000 2010

Adoption of Consumer-Driven Plans Continues to Accelerate Enrollment in Consumer-Driven Health Plans 2001 –2006

6,000,000 I fully expect to pay some share of my health care somewhere down the road. Would I like it? No. Would I understand it? Yes.

3,000,000 trace 120,000 1,000,000 500,000 Ja nu ar y 20 01 Ja nu ar y 20 02 Ja nu ar y 20 03 Ja nu ar y 20 04 Ja nu ar y 20 05 Ja nu ar y 20 06

GM auto worker

Sources:

Inside Consumer-Directed Health Care; Wall Street Journal;

Sg2 Analysis, 2005

.

The Access Project http://www.accessproject.org/downloads/Hospital_Finance.pdf

Contrary to Popular Belief, Health Care Is Not Recession-Proof

People will always get sick.

People don’t pay for health care.

Health care always grows.

The government will always be there.

Yes, But

They can, and do, defer care.

Employers do, and increasingly their employees do as well.

Remember the 1990s?

Not always, and Medicare and Medicaid usually pay less.

“We feel we are aiding society in this regard, while availing ourselves of the financial opportunities afforded by the one industry, health care, that has historically been recession-proof.

” —CEO’s Annual Report Letter

The Health Care Industry Moves in Cycles . . . Like Everything Else

Yearly Growth Rate 20% 18%

Phase I Back to the Future

16% 14% 12% Projected Average Growth in Total 10% 8% Health Care Expenditures 6% 4% 2% 0% 2001 2002 2003 2004

Phase II The Party Doesn't Last Consolidation and

2005

Retrenchment

2006 2007

Phase III Growth Returns

2008 2009 2010

Sources: U.S. Department of Health and Human Services

The Next 10 Years: A Mostly Flat Inpatient Market Med/Surg Inpatient Discharges* US Market, 2005 –2015

35,000,000

Population-Based Forecast

30,000,000

Sg2 Forecast 16% 10%

25,000,000 2005 2007 2009 2011 2013 2015

US Market

Discharges Patient Days ALOS

% Growth

10% 3% –7% *Excludes neonate, normal newborns, obstetrics and psychiatry.

Sources: Impact of Change  v4.0; NHDS; Sg2 Analysis, 2005.

Key Strategic Challenge: Finding Profitable Growth in a Flat Market

?

Technology Leadership Geographic Expansion Service Portfolio Expansion Efficiency Breakthroughs Service/Quality Breakthroughs

IP Growth Areas Include Interventional Cardiology, GI and General Surgery Service Line Landscape * † Relationship Between Percent Change in Days and Discharges US Market, 2005 –2015 % Change in Days

25% 20% Cardiology–Interventional -20% -15% -10% 15% General Surgery 10% Neurology Cardiology–Medical 5% 0% -5% -5% Pulmonary 0% 5% 10% Gastro enterology General Medicine Neurosurgery 15% 20% 25%

% Change in Discharge Volumes

-10% Vascular Services Oncology -15% Cardiac Surgery -20% *Bubble size represents DRG volumes in 2005. † Excludes neonates, normal newborns, obstetrics and psychiatry.

Source: Impact of Change  v4.0; NHDS; Sg2 Analysis, 2005. Orthopedics

Ambulatory Services Are the Growth Market in Health Care Inpatient and Outpatient Volume Growth for Cancer and Orthopedic Service Lines US Market, 2004 –2014

27.5% Inpatient Outpatient 9.8% 13.9% 19.2%  

Factors Driving Growth in Outpatient Services

 Technology Patient preference Physician preference  Higher case volume  Control over care process  Revenue opportunity  Proliferation of outpatient care options/players  Cost reduction imperative Cancer Orthopedics

Chart 4.3: Distribution of Outpatient vs. Inpatient Revenues, 1981 – 2005 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Gross Inpatient Revenue Gross Outpatient Revenue 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 Source: Avalere Health analysis of American Hospital Association Annual Survey data, 2005, for community hospitals.

Who Is Making Money in Health Care?

Profitability Across Health Industry Subsectors, 2002-2004

20%

Medical Device Pharmaceutical & Biotechnology

15% 10%

Health Plans

5%

Hospitals

0% 2002 2003 2004

Notes: Profitability measured as operating income of a select group of publicly-traded companies in each sector. Decline for hospitals in 2004 is almost entirely driven by the negative performance of Tenet.

A Big Construction Pipeline Is Still Working Its Way Through the System Acute Care Bed Construction at Different Stages U.S. Market, 1993 - 2004

60,000

Designed

50,000

1998: Turning point for new projects initiated

40,000

Broke Ground

30,000 20,000

Completed

10,000 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

2004: Turning point for new projects completed

There Is More Good Technology than Any Institution Can Buy BrainLab = $8 million ICDs = $30,000 each 64-Slice CT = $1.5 – 2 million DaVinci robot = $1.5 million

“There is no more delicate matter to take in hand, nor more dangerous to conduct, nor more doubtful of success, than to step up as a leader in the introduction of changes. For he who innovates will have for his enemies all those who are well off under the existing order of things, and only lukewarm supporters in those who might be better off under the new.”

~

Niccolo Machiavelli

Measuring Performance in Health Care Is Ambitious, Complex and Divisive Measures of Performance for Carotid Stent Procedure Satisfaction



Patient satisfaction



Return to Work

    Duration of

Convalescence Quality of Life

– Living at Home

Convenience Efficiency

 Length of Stay 

(LOS)

Procedure

Time

 Expendable

Supplies

 Post-Procedure Time 

Post-Discharge Care



Patient Perception

of (<30 Outcome

Physician Satisfaction

 Scheduling  Equipment / Staffing  Efficiency  Day Repeat IP)

Episodic Cost

 Hospital  Patient  Payer  

Longitudinal Cost Outcomes

 Successful

Deployment of Stent



Residual Stenosis

 Follow-up (Long-Term) Stenosis  Procedure Mortality  Procedure

Stroke

  Procedure

MI

Vascular

Complications

 Bleeding at Axis  Duration of Recovery  Successful Deployment of Stent Protection Device Residual Diameter Stenosis: # with 50% Increase (6 months later) 

Mortality and Morbidity

 % of Ipsilateral Strokes  TIAs <24 Hours  Activities of Daily Living

Infrastructure / Credentialing

  

Interventional Lab

: Road-mapping (fluoroscopy/digital flat panel/high resolution/real-time) Staffing 

Nurses

trained in dealing with slow heart rate, low   BP, stroke, bleeding, etc.

X-ray tech Physicians

 Cognitive: Patient Selection; Credentialing  Experience: Minimum # of Volumes  Complications Management

Performance Improvement Program

 Tracking  M & M Conferences  Corrective Actions  Improvement

Process



Candidate Screening/Selection

 Proper AMI Stroke  High-risk for Surgery  U/S, CT and/or MRI  Informed Patient Consent  Procedure Time-out  Correct Patient  Correct Side 

Post-Procedure Care

:  Dosage of Aspirin and Plavix  Neuro Exam Follow-up

Patients See Performance Differently What Medicare Hospital Patients Care About Most

Doctor communication skills

39%

Responsiveness of hospital staff Comfortable and clean room Nurse/hospital staff communication

34% 32% 35%

Pain management

7%

Affordability = Quality

Affordability is the most often cited (14%) measure of how Americans judge health care quality

Source: Centers for Medicare and Medicaid Services, Wall Street Journal

Top Ten Issues for the Healthcare Industry

1.

2.

3.

4.

5.

6.

7.

Medicare and the Medicare Drug Plan Care and Coverage of the Uninsured Rise of the Health Care Consumer Focus on Prevention Patient Safety Issues Driving IT Investments Diminishing Drug Pipeline Pay for Performance 8.

9.

Report Card Fever Technology Backbone 10. Labor Shortages Source: PricewaterhouseCoopers

Recommendations of the Committee on the Costs of Medical Care

1.     Both preventive and therapeutic services.

Organized groups of health professionals.

Hospital based but with home and office care.

Preserve physician and patient relationship.

Recommendations of the Committee on the Costs of Medical Care

2.

  Extension of all basic public health services to entire population based upon need.

Can be provided by government or non-government agencies.

Recommendations of the Committee on the Costs of Medical Care

3.   Costs of medical care be group based through insurance and/or taxes.

Individuals can continue fee basis as addition.

4.

  Medical services are important functions for every state and local community.

Coordination of rural and urban services requires special attention.

Recommendations of the Committee on the Costs of Medical Care

5. Professional Education  Physicians - greater emphasis on health and prevention of disease. Greater attention to the social aspects of medicine.

 Dentists - broader education.

  Pharmacists - more stress on opportunities for public service.

Training for nurse midwives and nursing aides and attendants be provided.

  Systematic training for hospital and clinic administrators.

Nurses - remolded to provide well-educated and well-qualified registered nurses.

Source: Report of Committee on the Costs of Medical Care - 1933

“Never make predictions, especially about the future” Yogi Berra

Reference Material

 A Community Leader’s Guide to Hospital Finance   The Access Project http://www.accessproject.org/downloads/Hospital_Finance.pdf

 TrendWatch Chartbook   American Hospital Association http://www.aha.org/aha/research-and-trends/chartbook  Health Care Costs – A Primer  Kaiser Family Foundation  http://www.kff.org/insurance/upload/7670.pdf