BB&T Contributing Editor

IRVINE, California — Trends in the healthcare system might seem a low priority for many in the midst of one of the worst economic crises in U.S. history. If, however, the number of attendees at the 2009 Health Care Forecast Conference, organized here by the Center for Health Care Management and Policy of the Paul Merage School of Business at the University of California Irvine (UCI), is any gauge, interest in healthcare is greater now than it has been for much of the past decade.

The conference, now in its 18th year, provides an annual update on trends in the healthcare market in the U.S., and on political and economic factors impacting participants in the market, including healthcare providers, insurers, and suppliers. In addition, a goal of the conference is to provide a forecast of future trends in healthcare, enabling those who are providing and paying for healthcare to plan for changing resource requirements and demand for products and services.

Given the high level of uncertainty surrounding the economy at present, the forecasts proffered at this year's conference were, perhaps understandably, less definitive and subject to a number of provisos. Some experts presenting at the conference believe that the current climate presents a rare opportunity for implementing major change in the healthcare system, while others see the focus on fixing the economy preempting any substantive progress in healthcare reform. Nevertheless, a number of developments in healthcare were described at the conference that are altering the way in which care is delivered, and which could drive significant change in the healthcare system's structure.

Economic priorities overshadow healthcare

The federal government plays a key role in the U.S. healthcare system, accounting for 34% of national health expenditures according to 2007 data from the Centers for Medicare & Medicaid Services (CMS; Baltimore). Furthermore, healthcare spending is accounting for an increasing proportion of overall federal expenditures. Federal spending on Medicare and Medicaid comprised 20% of total federal spending in 2007, and is projected to rise to 42% of the total by 2032 according to data presented by James Baumgardner of the Congressional Budget Office at the UCI conference.

If current trends continue unchecked, spending on healthcare and Social Security combined will consume the entire federal budget sometime prior to 2082. As a result, the ability of the federal government to increase overall spending will play an important role in determining the growth of the healthcare market.

The current economic crisis is expected to drive a significant increase in the size of the federal budget deficit, due mainly to the combined impact of a slowdown in tax revenue coupled with increased spending related to the economic stimulus package. As shown in Table 1 on page 6, prior to the passage of the economic stimulus package the Congressional Budget Office was projecting the budget deficit to more than double in 2009 compared to 2008, reaching almost $1.2 trillion, and there was no prospect of a budget surplus at any point within the forecast horizon. As recently as two years ago, the CBO was projecting a budget surplus by 2012.

Baumgardner said that, when the impact of the recently passed stimulus package is taken into account, the 2009 deficit is projected at $1.4 trillion, or about 9.5% of GDP. The mounting deficit is expected to create considerable pressure to limit federal spending, with perhaps the most intense pressure focused on healthcare spending, making the prospects dim for implementation of any type of healthcare reform program that would require increased expenditures. Recovery of the economy and a return to strong economic growth could reverse that situation, but even the most optimistic forecasts project stabilization of the economy, i.e., an end to the decline in gross domestic product, by mid-year, with some signs of revival by year-end.

As discussed by James Glassman, PhD, senior economist and managing director, J.P. Morgan Chase & Co. (New York), at the UCI conference, the excesses that drove the housing market bubble are no longer present, and a key factor that contributed to the slowdown of the economy, high oil prices, has now not only been eliminated but has been replaced by the positive stimulus of low energy prices. Nevertheless, there is very little hope that the economic downturn will be reversed in time to allow the government's focus to turn to healthcare in 2009.

While the stimulus program is expected to add to the negative impact of the budget deficit on healthcare funding, there are some provisions in the program along with some additional new legislation that will directly benefit healthcare, at least in the short term. According to Karen Davenport, director of health policy at the Center for American Progress (Washington) and a former legislative assistant to Sen. Bob Kerrey, reauthorization of the State Children's Health Insurance Program (SCHIP) will cover an additional 4.1 million children who would otherwise be uninsured, and bonus payments are included to incentivize the states to find and enroll eligible children.

The SHCIP legislation enables the states to expand eligibility for children living in families with incomes up to 300% of the poverty level, and gives states the option to cover legal immigrant children without a five-year waiting period.

In addition, there is a 6.2% increase in the federal matching rate for Medicaid, with bonuses based on unemployment rates in each state, providing an estimated $89 billion in funding to the states to provide care for low-income individuals.

Another $25.1 billion in spending is earmarked for health insurance assistance for the unemployed. The stimulus package also includes $22.8 billion in incentive payments for adoption of health information technology, benefiting suppliers of software and health IT systems although questions exist about the suitability of existing IT offerings for today's physician practices.

Finally, the stimulus program will provide $9.7 billion in increased funding for the National Institutes of Health and $1.1 billion for comparative effectiveness research. Cumulatively, the increased federal funding for healthcare is proportionately equivalent as a percentage of total U.S. healthcare spending to the entire economic stimulus package in proportion to GDP.

Some concerns have been raised in certain states, notably by the Republican governors of Louisiana, Mississippi, South Carolina, Texas and Idaho, about the long-term impact of the stimulus package, particularly with respect to the increased financial liability that the states will face due to growth in the number of enrollees in their Medicaid programs. Since the stimulus provisions are temporary, the states are likely to be saddled with significant increases in cost when federal funding expires, since it will prove difficult to remove new beneficiaries from the Medicaid program once they are enrolled.

Some governors have stated they will refuse to accept the federal stimulus funds in order to avoid the added financial liability that would entail. Most states, however, are welcoming the new funds provided by the stimulus package, which will provide a boost for the healthcare market that will in all likelihood continue after the stimulus funds have been spent.

Dean Rosen, a partner at Mehlman Vogel Castagnetti (Washington), said the program expansions that are being implemented at the federal and state levels are essentially de facto healthcare reform, taking the place of wholesale revamping of the healthcare system as has been the goal of many in Washington including Sens. Edward Kennedy of Massachusetts, Chuck Grassley of Iowa, and Max Baucus of Montana, as well as President Barack Obama.

Healthcare reform was a key facet of Obama's campaign platform, with 68% of his total TV advertising devoted to healthcare themes. Furthermore, post-election polls of voters conducted by Greenberg Quinlan Rosner Research show that affordable healthcare for all was the third most important reason for supporting Obama, after withdrawal of troops from Iraq and tax cuts for the middle class. Rosen said that, as a result, there is an expectation that Obama will pursue some type of healthcare reform.

Major reforms are unlikely, though, due to competing priorities, leaving incremental change as the most probable outcome, particularly in light of the fact that a number of changes (SCHIP expansion, COBRA/Medicaid subsidies for the temporarily unemployed, funding of comparative effectiveness research, and health IT funding) have already been legislated.

Additional incremental reforms that are being considered include expansion of Medicare or Medicaid to cover those in the 55-64 age group, tax credits or Medicaid expansion for middle-income individuals without employer coverage, additional federal limits on disqualification of health insurance for existing conditions, and limits on insurance rates linked to increased subsidies.

Other initiatives will address quality and cost of healthcare, including initiatives aimed at prevention, adherence, and chronic care management, as well as rebates for low-income individuals on Medicare.

Changes also are being proposed that are designed to rationalize entitlement program payment, such as pay-for-performance initiatives, increases in reimbursement for primary care and preventative medicine, and implementation of medical home programs. While the initiatives which have been implemented or proposed fall short of a complete overhaul of the U.S. healthcare system, they are nonetheless meaningful and, more importantly, possible in the current political and economic climate.

The primary issue, according to Rosen, is who will pay for the new programs. Among those who are likely to be tapped to help fund the initiatives are insurance companies, employers, pharma and biotech companies, and possibly providers. It is almost certain that cuts will be made to the Medicare Advantage program which will impact insurers, and insurance reforms also are a possibility, including guaranteed issue and rate limits.

"Pay or play" requirements for employers are under consideration, which would mandate that employers either provide health insurance or pay a fee, and there also is consideration of a modification or cap of the employer tax exclusion for health insurance costs.

Pharma and biotech companies may be required to provide rebates for low-income Medicaid recipients under Part D, which covers prescription drugs, and authority may be conferred to the Department of Health and Human Services to negotiate prices for drugs and biologics.

Insurers prosper, hospitals suffer

Some players in the healthcare system have prospered in recent years while others have seen their financial performance decline. Insurers such as UnitedHealth (Minneapolis), Aetna (Hartford, Connecticut) and WellPoint (Indianapolis) have reported strong increases in earnings, although the economic slowdown in 2008 negatively impacted the trends.

As discussed by Sheryl Skolnick, PhD, senior vice president of CRT Capital Group (Stamford, Connecticut) at the UCI conference, UnitedHealth alone had more cash flow in 2008 than all of the publicly traded hospitals combined, and the company's net income, while declining in 2008 due to increased costs, nevertheless almost doubled between 2003 and 2008 along with revenues.

While share prices of major investor-owned health insurers have declined substantially (between 40% and 44% for UnitedHealth, Aetna and WellPoint), the drop is in line with trends in the overall stock market. Skolnick said she believes health plans are too profitable at present, with little or no data to support their claims of added value, putting them at a high level of political risk going forward.

A key factor that has enabled insurers to maintain profitability has been the substantial increase in premiums which the industry has realized. A nationwide survey sponsored by the Kaiser Foundation (Oakland, California) and the California Health Care Foundation (also Oakland), discussed at the conference by John Gabel of the National Opinion Research Center at the University of Chicago, shows that health insurance premiums increased 103% between 2000 and 2008, while prices increased only 21% and wages increased 25%. The average cost for health care insurance for a family of four is now greater than the annual earnings for a minimum wage worker.

Insurers also have shifted cost to employees by increasing deductibles, including switching to high-deductible health plans, and by implementing tiered drug plans with higher cost-sharing. Overall, deductibles nationwide increased from $266 to $441 from 2005 to 2008, according to Gabel.

Increases in healthcare premiums have continued to outpace inflation, although the increase in 2008 of 6.1% nationwide was the lowest since the 1990s. Gabel said he expects the growth in deductibles to continue in light of the economic downturn, and also predicts major declines in the number of employers offering coverage, although the percentage increased slightly in 2008, based on the survey results, which are derived from data collected from January through May 2008.

Hospitals have fared much worse than insurers over the past few years, squeezed by declining reimbursements and increasing costs. One of the largest operators of hospitals in the U.S., HCA (Nashville, Tennessee), reported net earnings of $673 million in 2008, equal to 2.5% of revenue, and down 23% vs. 2007, although the fourth quarter was surprisingly strong for for-profit hospitals.

Hospitals continue to be over-burdened with debt, and are now beginning to join other sectors of the economy in laying off workers. One particularly negative factor is that hospitals are the only sector of the healthcare system that bears the cost for treating uninsured patients, a cost that they attempt to cover by increasing charges to paying patients. At present, one in 10 patients treated in U.S. hospitals do not pay. As the number of uninsured individuals in the U.S. has grown to 45.7 million, including 6 million children, the financial burden on hospitals has increased, while limits on reimbursement make it more difficult to subsidize non-paying patients with revenue from patients and insurers who pay.

The situation is not likely to change until a mechanism is implemented within the health care system to provide insurance coverage for all, and that does not appear imminent even if the economy improves. Rather, the incremental changes being made to the healthcare system will in principle begin to drive a slow decline in the number of uninsured, helping to make the problem more manageable for hospitals.

Insurers, however, cite factors such as redundant and inappropriate care, the increasing practice of defensive medicine in response to rising costs for medical liability, and medical errors as factors which drive up the cost of care. As shown in Table 2, physician services and hospital inpatient and outpatient costs combined account for over two-thirds of the health care insurance dollar, with insurer profits accounting for only 3%. Consequently, driving down the cost of health insurance, and thereby making it more affordable for the uninsured, will depend on reducing the cost of care.

Another initiative that could reduce the number of uninsured individuals is to implement outreach programs to extend coverage to more of those who are eligible for Medicaid and other government programs such as SCHIP. That initiative alone could reduce the number of insured by 12 million, according to data presented by Leslie Margolin of Anthem Blue Cross at the UCI conference. Combining outreach programs with increases in coverage to include children up to 300% of the federal poverty level, parents to 200% of FPL, childless adults to 100% of FPL, and premium assistance could provide coverage for 37.5 million individuals, or 82% of the uninsured. The remaining 18% of the uninsured who make over 300% of FPL could in principle be covered by expansion of employer-based insurance.

Mandate for change in delivery

Regardless of the relative degree of culpability of the different sectors of the health care system in creating the current state of dysfunction, there is a strong consensus that the delivery of healthcare is in need of fundamental change. The lack of effective use of information technology, poor access to primary care, lack of coordination and integration of care across the multiple providers in the system, and issues with quality and safety for providers are shortcomings which need to be rectified if healthcare is to become affordable and readily available for everyone.

One approach to improved healthcare delivery that was introduced more than 40 years ago, the Medical Home, is gaining increased traction as a structure that can address many of the deficiencies in the existing health care system. As discussed by Elizabeth Stewart, PhD, of TransforMED (Leawood, Kansas) at the conference, the Medical Home concept was first introduced by the American Academy of Pediatrics to describe a single source of medical information and coordination for children.

Over the next 40 years, many other organizations endorsed the concept, and in 2007 four major medical organizations (the American Academy of Family Physicians, the American Academy of Pediatrics, the American College of Physicians, and the American Osteopathic Association) reached agreement on the joint features of the patient-centered medical home, and in 2008 the American Medical Association gave its endorsement.

As shown in Table 3 on page 10, there are seven core features of the Medical Home. The Medical Home concept em-phasizes the role of primary care and the personal physician based on evidence that countries with strong primary care infrastructures have lower healthcare costs and better outcomes. Unfortunately, the trend in the U.S. has been toward a shrinkage of the primary care physician workforce, with a recent study showing that 49% of primary care physicians plan to cut back or retire in three years. Consequently, implementation of the Medical Home structure will require re-direction of physician training to increase the availability of primary care resources.

At present, primary care accounts for only 7% of healthcare expenditures, indicating not only its low priority in the U.S. healthcare system but also its cost-effectiveness. The Medical Home also makes appropriate use of information technology to improve access, provide efficient coordination of services, and facilitate the use of evidence-based medicine. Patient participation in care decisions and patient feedback on the appropriateness and quality of services are additional key features.

The feasibility of the Medical Home and assessment of its benefits is being evaluated in a demonstration program now in progress in physician practices located throughout the U.S. The demonstration program is being managed by TransforMED in partnership with the American Academy of Family Physicians and involves 36 practices in rural, suburban and urban communities. So far, 18 practices have fully implemented the model.

Implementation is a challenging process, and involves a transformation of the practice that includes using electronic medical records, Internet-based communication with patients, electronic orders and reporting, e-prescribing, optimized coding and billing, e-visits, and office redesign. One of the most notable changes is implementation of open scheduling, i.e., making it the norm for patients to call to set up a visit on the same day.

The TransforMED program has been under way for about two years, and so far no hard data is available on outcome improvement or cost-effectiveness. However, other Medical Home demonstration programs, such as one implemented within the Geisinger Health System (Danville, Pennsylvania), have demonstrated a reduction in hospital admissions of 20% according to Stewart, and a program at Marillac Clinic (Grand Junction, Colorado) resulted in a 40% drop in ER visits and a 56% drop in hospitalizations.

In all, more than 25 Medical Home demonstration projects are under way in 22 states, including a major two-year project involving 200,000 patients that is about to be launched by CMS that will evaluate cost, utilization, and outcomes.

A Medical Home accreditation program has been established by the National Committee for Quality Assurance (NCQA; Washington) which offers three tiers of Medical Home recognition and which is a required aspect of many pilot demonstration programs. A goal is to make Medical Home accreditation a factor that justifies increased reimbursement by public and private payers. NCQA accreditation is a requirement of the CMS demonstration project, and qualified practices will receive additional payments as part of the program.

Among those in Washington supporting the Medical Home concept is Sen. Baucus of Montana, who has suggested that reimbursement for specialists may be reduced in order to pay primary care physicians for currently non-reimbursable coordination services.Implementation of the Medical Home is not without its challenges, however. The Medical Home involves much more than simply implementing advanced health information technology in the medical practice.

Some physicians are skeptical that the Medical Home is simply the latest fad in practice management, and some patients are not willing to substitute e-visits for in-person physician visits. In addition, not all patients are web-enabled, so it may not be feasible to convert an entire practice to the Medical Home model. Stewart said that, at present, fewer than 50% of physicians are familiar with the Medical Home concept, creating another barrier to adoption.

Perhaps most importantly, the majority of the cost of implementing the Medical Home is not reimbursable, so physicians must be willing to make a significant financial commitment in order to adopt the new model. The economic stimulus package may facilitate implementation through the added funding it provides for health IT.

The impact of medical travel

Another development in healthcare delivery which is changing the way in which patients access care is medical travel. Like the Medical Home, medical travel is not a new concept, since patients have been traveling to the U.S. to access advanced medical treatments for decades, and U.S. patients have likewise traveled outside the country to undergo treatments which are not available at home due to regulatory limitations.

Increasingly, however, medical travel is enabling patients to receive treatments at substantially lower cost than would be possible in the U.S., resulting in strong growth in the number of patients seeking treatment in foreign countries.

According to Victor Lazzaro Jr., CEO of BridgeHealth International (Englewood, Colorado), between 500,000 and 700,000 patients are crossing the border and traveling outside the U.S. annually for medical treatment, with a resultant savings of $20 billion per year based on a 2008 report by McKinsey & Co. (New York). The cost advantage for a typical medical procedure is quoted at 28% to 88%.

Medical travel accounts for a significant portion of patients treated in the U.S. as well, with 10% of all patients visiting from Canada and the UK, according to Lazzaro. A survey of more than 800 patients conducted by BridgeHealth found that a savings of $3,000 to $10,000 is sufficient to interest a patient in medical travel.

In addition to cost advantages, medical travel can be attractive due to enhanced access to care, as well as for the simple reason that it provides an opportunity to visit a country or region that the patient might otherwise never see. BridgeHealth now has a network of 15 centers of excellence providing medical care worldwide, and provides access to both medical and dental procedures. The company coordinates all aspects of travel, lodging, and medical care.

In one example, that of a hip replacement performed in Asia, an employer using BridgeHealth to provide the procedure for an employee could save $27,000 vs. the cost of having the procedure performed in the U.S. Medical travel also has the benefit of providing competition for U.S. healthcare providers, potentially helping to limit the rise in domestic health care costs.

Clinics, kiosks provide care

Yet another advance in healthcare delivery is the expanding role of retail medical clinics and health kiosks that provide readily accessible primary care services at an affordable price. As discussed by Margaret Laws, director of innovations for the Underserved at the California HealthCare Foundation, a Harris poll sponsored by the Wall Street Journal found that 7% of those surveyed have used a retail clinic.

Examples of retail clinics include the MinuteClinic chain operated by CVS Caremark (Woonsocket, Rhode Island), the Take Care network operated by Walgreens (Conshohocken, Pennsylvania), and QuickHealth (San Mateo, California), which operates a network of eight clinics in Northern California. The MinuteClinic network includes more than 500 retail clinics in 25 states, and the Take Care network consists of nearly 700 worksite and retail clinics nationwide, including 326 retail clinics in 18 states.

In total, there now roughly 1,100 retail medical clinics in operation nationwide according to Laws. Patient volume in newly opened clinics has expanded rapidly. For example, Take Care clinics that have been open for more than a year have experienced a 65% increase in patient volume.

Retail clinics focus on treatment of common illnesses such as allergies, bronchitis, pink eye, sinus infections, swimmer's ear, minor skin infections and rashes, and suturing of simple wounds. The clinics also provide various types of medical exams and in-store laboratory tests such as pregnancy tests, cholesterol tests, diabetes screening, and physical exams as well as vaccinations. Cost per visit averages between $60 and $70.

A recent study conducted in the MinuteClinic network found that the use of evidence-based medicine in patient care was two-fold higher in retail clinics compared to the norm for all types of primary care facilities. While Laws said that forecasts for the rate of expansion of the retail clinic sector may be overly optimistic, she believes that they can potentially play a significant role in expanding the availability of healthcare.

Telemedicine also is becoming an increasingly important component of the healthcare delivery system. As described by Laws, the California HealthCare Foundation is sponsoring pilot studies to improve access to primary, specialty and dental care through the use of telemedicine.

In January of this year, the foundation established the California Center for Connected Health, a strategy and planning body designed to lead and coordinate telehealth adoption throughout California. The center will collaborate with the University of California system to promote telehealth adoption, and will manage a specialty care pilot project for the UC campuses and community-based clinics to develop a sustainable model for telehealth services.

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