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in Healthcare, The Future

A brief history of healthcare reimbursements in the US, the unintended consequences of the ACA, and what the future may hold.

The ACA has had a number on unintended consequences for both providers and patients. I’ve put together an outline of a few major milestones that led us up to this point, how it’s driving change in healthcare today and where I think it’s going in the future.

A brief history of healthcare reimbursements

    • 1929
      • The Blue Cross plan was the first hospital insurance plan in the US put together by a group of employers in Dallas led by Baylor University.  This was the foundation for the eventual creation of the Blue Cross and Blue Shield plans we know today. Hospitals and Physicians were reimbursed on a retrospective, cost-based, fee-for-service basis.
    • 1940s
      • The employer-based healthcare market is launched as business owners started offering health insurance as part of their employee benefits package. Hospitals and Physicians were paid on fee-for-service basis, and these employer plans paid all or part of the premium costs for employees.
    • 1965
      • Congress creates Medicare and Medicaid programs, providing healthcare for Americans over 65 as well as low-income Americans.
      • Health care professionals and government officials begin calling for affordable, accessible outpatient surgery alternatives that can continue to deliver top-quality patient care.
    • 1970
      • The first Ambulatory Surgery Center (ASC) is created. An ASC also known as outpatient surgery centers, same day surgery centers, or surgicenters, are health care facilities where surgical procedures not requiring an overnight hospital stay are performed.
    • 1971
      • The American Medical Association adopts a resolution endorsing the concept of outpatient surgery under general and local anesthesia for selected procedures and selected patients.
    •  1973
      • The Health Maintenance Organization Act of 1973  was approved by congress. A health maintenance organization (HMO) is a medical insurance group that provides health services for a fixed annual fee.  This was the first time the federal government was focused on promoting healthcare on a prepaid managed care basis.
      • “Managed care” was intended to reduce unnecessary health care costs through a variety of mechanisms, including: economic incentives for physicians and patients to select less costly forms of care; programs for reviewing the medical necessity of specific services; increased beneficiary cost sharing; controls on inpatient admissions and lengths of stay; the establishment of cost-sharing incentives for outpatient surgery; selective contracting with health care providers; and the intensive management of high-cost health care cases.
    • 1975
      • A total of 42 Ambulatory surgery centers were in operation in the United States.
    • 1982
      • Derivative of HMOs, congress mandated the creation of a prospective payment system (PPS) for Medicare. This payment system reimburses hospitals on a per-case basis according to diagnosis-related groups.   Under these groups, Medicare paid hospitals a flat rate per inpatient case based on diagnosis. The goal of this program was to reward efficiency and create motivation for inefficient hospitals to improve.
      • Medicare approves payment to ASCs for approximately 200 procedures,
    • 1998-2000’s
      • Congress creates PPS systems for skilled nursing facilities, home health agencies(1999), hospital based outpatient services(2000), inpatient rehabilitation facilities (2002), and inpatient psychiatric facilities (2005).
    • 2010
      • Congress enacts the Patient Protection and Affordable Care Act. This act helps provide health insurance to uninsured Americans, while also creating a spectrum of new payment systems including accountable care organizations, patient-centered medical homes, shared savings programs, pay for performance programs, hospital value-based purchasing, and bundled care payments.  The ACA also contains penalties for unnecessary readmissions. This created a new era for reimbursement directly tied to quality, outcomes, and moves toward making sure patient care is delivered in the most efficient manner and setting.
      • The ACA marked the shift from fee-for-value to fee-for-service reimbursements for healthcare providers.
    • 2011
      • More than 5,300 ASCs in the United States perform 23 million surgeries annually. Medicare grants approval for ASCs to perform more than 3,500 procedures.
    • 2017
      • The Moody’s Investor’s Service analysis of audited FY17 financial statements for 303 free-standing hospitals, single-state health systems, and multistate healthcare systems found a “significant income contraction,” cutting median operating margins from 2.7 percent in 2016 to 1.6% in 2017. “In terms of Medicare revenue and Medicaid revenue, the increases have been below the expense ramp up at hospitals” in recent years, said Steve Valentine, a vice president at Premier.
      • “The significance is that the decline has been happening for two years now and it is at an all-time low,” Rita Sverdlik, a Moody’s analyst, said in an interview. “The general takeaway is that profitability levels are declining.” The profitability pressures are especially impacting smaller hospitals. Small and mid-size hospitals face the additional challenges of reduced negotiating power with health plans and greater difficulty attracting clinical staff.
    •  2019
      • The unintended consequences of the ACA is that employees are picking up a larger cost share resulting from a trade-off of lower health insurance premiums for higher deductibles and out-of-pocket costs. The tax differences between paying premiums, which are typically paid with tax preferred payroll deductions, and out-of-pocket costs, typically paid with after tax dollars, compounds the financial burden on employees.
      • The non-profit research firm Physicians for Fair Coverage (PFC)  found that since 2014 insurance companies, prevented by law from denying coverage for pre-existing conditions, have been protecting their exorbitant profits by limiting patient access to specialists, raising deductibles and maximum out of pocket limits, and increasing their premiums far more and much faster than similar markets such as Medicare and employee-sponsored health care plans.
      • Hospitals and Ambulatory Surgery Centers operating in high density Medicare/Medicaid populations are receiving all-time low reimbursements if they do not fall within ACA fee-for-value standards, causing many to close and further liming patients to expensive care options. Many medium and smaller providers continue to struggle with attracting clinical staff and negotiating rates with health plans.  About 15 percent of Medicare beneficiaries who have both chronic illnesses and long-term care needs now account for about one-third of Medicare’s spending.

What does this mean for the future?

  • These reforms are driving a simultaneous unbundling and consolidation of healthcare.
  • Limited free cash flow means hospitals struggle to invest in cost saving innovation initiatives, and the ever shifting regulatory landscape means innovation is slow.
  • On one hand, new technology is enabling the unbundling of specific care segments. There are new types of technology centric family practices (Forward  & One Medical), stand alone Imaging Centers, and the significant growth of Ambulatory surgery center are all signs of the unbundling of services from larger systems. Technology reforms means these businesses are able to operate efficiently within ACA guidelines, and rather than reform within an existing system, technology means is easier to setup an entirely new practice all together.
  • On the other hand, there’s a consolidation happening with Goliath systems like HCA or Steward acquiring inefficient ASCs or staffing with independent doctors who may be out of network because the consolidation enables them to reduce operating overheads and get better reimbursement rates from private insurers.
  • Long term, we’re going to see an entirely new generation of technology-enabled, hyper-efficient healthcare practices emerge as a long tail solution to the current consolidation. But this change, in my opinion, in generationally driven. Healthcare is not meritocratic, and physicians practice well into their golden years, keeping all the power at the decision making levels.  The fundamental shift is happening, and it’s a tidal wave that is going to hit over the next ten to twenty years.

Chloe Alpert is the co-founder & CEO of Medinas, the pre-owned medical equipment marketplace. She has founded two profitable companies in the consumer and financial technology spaces. She won the Forbes 30 under 30 Change the World Competition in 2017, the San Francisco Wework Creator Awards in 2018, and the $1M Global Wework Creator Awards in 2019. She has served as an advisor and consultant to multiple notable startups, FTSE 100 and Fortune 500 corporations and currently lives in Berkeley.

Sources:

  • Green and Rowell, Understanding Healthcare, Table 2-A
  • Medicare Prospective Payment System, 7
  • Greater New York Hospital Association, GNYHA Summary of Major Problems
  • Healthcare Supply Chain, At The Intersection of Cost, Quality and Outcomes 
  • Unintended Consequences of the ACA: Surprise Medical Bills
  • Komisar HL , Feder J . Transforming care for Medicare beneficiaries with chronic conditions and long-term care needs: coordinating care across all services . Washington (DC) : Georgetown University ; 2011 Oct . Google Scholar
  • ASCA.com