Health Care Economics: The Real Source of Reimbursement Problems

July 2016

Robert Fifer, PhD, AuD, CCC-A


Reimbursement for all health care services has been under downward pressure for several years. Newspapers have published articles citing the "greed" of hospitals, physicians, and other health care providers. Congress has reacted by instructing Medicare to control payments in order to keep the Medicare trust fund "budget neutral." Consequently, the result has been decreased payments across the health care system to both hospitals and providers. Although there is ample research available, it seems that virtually no one in Washington, D.C., wants to tackle the root causes of the health care crisis. The Affordable Care Act (ACA) had the primary intent of controlling and lowering health care costs by spreading the risk among both the healthy and the unhealthy populations. It was also intended to provide ongoing relationships with primary care physicians (PCPs) in order to avoid overuse of emergency departments and allow patients to seek treatment without delays. By focusing on good health, ongoing relationships with the medical community, and prompt treatment, the hope and intent of the ACA was to decrease the overall cost of health care for the entire country. Unfortunately, it did not address many of the root causes that have increased health care costs over the last 30 years. This article will highlight several major factors responsible for the rapid rise in health-related expenditures.

The United States spends far more on health care than does any other country in the world. At last count (2015), approximately 17.1% of the gross domestic product (GDP) was spent on health care services (The World Bank, 2016). The country with the next highest spending is the Netherlands, which spends approximately 12% of its GDP on health care. U.S. politicians commonly say that we have the best health care system in the world. Unfortunately, that is not true. When the World Health Organization examined the quality of health care services, the United States ranked 37th in the world (Murray, Phil, & Frenk, 2010). Some of the factors that went into the rating included infant mortality, permanent handicaps as a result of disease, high-risk teen pregnancies, cardiac disease, and many others. France ranked number one in the world, with expenditures of less than 12% of GDP. Given the magnitude of our investment in health care services, why do we in the United States not increase our return on investment?

Before 1985, health care expenditures in the United States were roughly equal to those of other industrialized countries. However, in 1985, attorneys were allowed to advertise directly to the public for the first time. Television commercials stating that birth defects due to prematurity or complicated pregnancies became commonplace. A few years later, pharmaceutical companies began directly advertising to consumers. As a result of these changes in direct advertisement, malpractice lawsuits skyrocketed, and patient demands increased for specific medications, whether or not those medications were appropriate.

Also in the mid-1980s, computers became available for clinical laboratory use, offering the opportunity for increased knowledge of anatomy and physiology as well as treatment advancements. The knowledge base of "how things work" grew logarithmically starting in the early 1980s. Advances in knowledge also led to new pharmaceutical treatments and improved quality of life. More recently, however, pharmaceutical companies have gained as much notoriety for exorbitant pricing as they have for treatment effectiveness. Collectively, these advances have caused upward pressure on health care costs, although they also have improved the quality of life for many patients.

Insurance Coverage

Another factor affecting the cost of health care has been the insurance industry. In theory, insurance coverage should decrease the cost of health care because everyone is paying premiums and sharing the cost of treatment across beneficiaries, thus reducing the financial risk that families face. However, this results in a lack of transparency of the true cost of health care. Having insurance coverage has also created an unintended consequence called price sensitivity—the degree to which the price of a product affects consumer purchasing behaviors. For example, how many people have gone to a physician's office asking if a particular service was covered by their insurance? If the service is covered, the patient wants it. If the service is not covered, the patient more often declines that service. Patients ask, if I am paying my health care premiums, why not get my money's worth? This leads to unwarranted office visits, tests, and treatments. But very few understand that there is a finite quantity of health care services, and as the services are used up, the economic principle of supply and demand takes effect. That is, as supply dwindles and demand increases, the price goes up. We are seeing shortages in the number of PCPs, and we are forecasting shortages in the number of specialists (Association of American Medical Colleges, 2015). The quantity of health care services is actually very limited. Patients are feeling the law of supply and demand in the wait times for appointments and also in the costs of treatment.

Insurance companies have attempted to control the cost of health care by shifting more of the responsibility to the individual. In 2002, the out-of-pocket expense, on average, for a family of four was $9,235 per year. By 2011, this number had risen to $19,393 for a family of four. And for 2016, the average out-of-pocket expense is $25,826 (Girod, Weltz, & Hart, 2016). Insurance companies are attempting to discourage overuse by making subscribers more price sensitive through high deductibles, co-pays, and co-insurance (the portion of the health care bill for which the subscriber is responsible after the deductibles have been met).

Clash for Control

A "virtual battle" exists between insurers and hospitals. Insurers want to negotiate down what they pay the hospital, and the hospitals want to negotiate up what they are paid. From the hospital perspective, "bigger is better"—and merging hospital systems to cover a large geographic or population area creates more bargaining power to increase reimbursement. As a result, hospital mergers have become very common since the year 2000 (Dafny, Ho, & Lee, 2016).

Hospitals have also discovered that if they purchase physician private practices, the hospital increases profit by outpatient appointments and by inpatient admissions generated by those same physicians. In addition, the hospitals can increase prices through the use of what is known as a facility fee. For example, an electrocardiogram in a private physician's office may cost somewhere in the neighborhood of $375. The same service offered by the same people in the hospital setting may cost more than $1,400. The difference is the facility fee. The facility fee is not necessarily a bad thing because it covers the fixed costs of operating the facility. But the question to be asked is, "When does the facility fee become excessive relative to the basic cost of the service?"

Our traditional payment methodology has been a major contributor to the overall cost of health care in this country. Under fee-for-service, we are incentivized to do more in order to be paid more. Medicare has been tracking billing patterns by Current Procedural Terminology (CPT) code, billing profession, and place of service for many years. When Medicare administrators take note that the use of a particular service rises quickly over time, they automatically assume that the service is being used as a "cash cow" and is therefore being overpaid. This assumption often results in a reevaluation of the CPT code and a lower reimbursement rate. What Medicare administrators do not realize is that reducing reimbursement on a procedure does not eliminate the perverse nature of the "do more to be paid more" concept. Across all of health care, providers continue to do even more in order to make up for the lost revenue and to maintain expected salary levels. As a result, utilization of specific procedures increases—as does the total cost of health care in this country.

Emergency Room Visits

Another factor affecting the cost of health care is the use of the emergency room for primary care. In general, three groups of individuals access health care through the emergency room: Medicaid recipients, underinsured individuals, and uninsured individuals. Medicaid recipients often do not have a PCP with whom they have an ongoing relationship, especially in large urban areas. Rather, it is quite common for them to go to health centers, where they will see the physician of the day or a nurse practitioner. Although these patients receive quality health care services, the disadvantage is that the rotating service providers do not get to know the patient as well as a single PCP, nor do they know the factors that affect that patient's health. Individuals who are underinsured do not have adequate coverage for many types of ailments and typically have sought treatment only to be denied on the basis of lack of insurance coverage. If or when the time comes that they are "sick enough," they will go to the emergency room with the understanding that, by federal law, they must be seen. And the uninsured typically have nowhere to go except free clinics (of which there are very few) or the emergency room. In 2014, 48.2 million people in the United States (15.2%) were without health insurance for part or all of the year (CDC, 2015). Of that number, approximately 33 million (10.4% of the population) went without health insurance for 12 months or more (Collins, Gunja, & Beutel, 2015). Analysis conducted in the latter part of 2015 indicated that these uninsured individuals were disproportionately poor, Black, and Hispanic. In addition, 4.5 million of them were children (Barry-Jester & Casselman, 2015). Although gains in providing coverage have been made in the last 2 years through the ACA, the number of uninsured individuals continues to be approximately 10% of the American population.

Research conducted by The Commonwealth Fund indicates that approximately 31 million people—23% of whom are 19- to 64-year-old adults—are underinsured; 51% of underinsured adults reported problems with medical bills or debt; and more than 44% reported not getting needed care because of cost (Collins, Rasmussen, Beutel, & Doty, 2015). As a result, access to health care is delayed until it becomes life-threatening—which means use of the emergency room. This option is the most expensive of all choices for health care services. By virtue of the high overhead associated with emergency rooms, the cost of services in an emergency room can be anywhere from 100% to 1000% higher than in a physician's office.

Having health insurance does not guarantee access to health care. Research sponsored by the Agency for Healthcare Research and Quality (AHRQ) found that access disparities are widespread and are associated with the factors of race, ethnicity, and gender (AHRQ, 2015). Along with access disparities, quality-of-care disparities also exist that are associated with the same factors. For example, expensive diagnostic tests are performed with less frequency on individuals of minority racial or ethnic standing. The more expensive treatment is recommended less often for these groups. The net effect is a greater magnitude and seriousness of illnesses and more expense to the health care system.

Return on Investment, or Market Value

Return on investment (ROI) is an economic term focused on the real or perceived value of devoting time, money, or effort toward a specific purpose. With the United States investing more money and effort in health care services than any other country, the absence of ROI is very significant in many ways. First and foremost, the trajectory of health care expense growth over the last 30 years is unsustainable. The fact that 36 countries—all of whom spend less of their GDP percentage on health care than the United States does—have much better ROI than the United States signifies that there is significant waste or abuse within the system. The basic structure of our health care system is a contributor to the reduced ROI in that there are four main components of the system—the physician, the patient, the hospital, and the insurance company, each with differing financial interests. The patient's expectation is that medical treatment should cure or ameliorate the effects of illness, chronic disease, or trauma. But that does not appear to be happening, as evidenced by the number of repeat admissions to hospitals. Approximately 20% of Medicare patients are readmitted within 30 days with the same diagnosis (American College of Emergency Physicians, 2015). This suggests that the treatment delivered the first time and for the majority of these patients was not effective or appropriate.

The many factors mentioned thus far have each contributed to a reduced ROI. Another factor contributing to the increases in health care costs is the silo effect—the professional isolation and often complete lack of communication among the various health care disciplines. The silo effect implies an absence of collaboration, interaction, and communication with other health care disciplines in the care of an individual patient. It is comparable to the analogy of children in parallel play. Each child is in the same room engaged in play activity with the toy, but with virtually no interaction with other children. It is not my intent to declare health care providers equivalent to children, but the analogy holds in the sense that many health care disciplines operate within their own sphere of practice, communicating very little with colleagues in other disciplines treating that same patient. Research has also shown that this lack of interprofessional collaboration may be a major contributor to the rise in costs (Robert Wood Johnson Foundation, 2011). For example, if cardiology treats a patient with a particular medication and orthopedics treats that patient with another medication, and those medications are not compatible, the patient—many times—ends up with a poor outcome. An unfortunate fact is that the scenario of dispensing incompatible medications is very common. Issues such as this spanning across all of health care have given impetus to various models of service delivery. Two of the more common models being touted at the moment include accountable care organizations and the "medical home."

New Service Delivery Models

Accountable Care Organizations
Accountable care organizations (ACOs) are structured to be the equivalent of "one-stop shopping," where all of the patient's needs are obtained through a single health care system for diagnostics, treatment, and rehabilitation. There is a shared responsibility among all providers in the care of the patient. By virtue of that shared responsibility, ongoing, open communication is essential such that each provider is aware of the patient's history, the treatments being applied, and any other considerations that may affect any single discipline's clinical judgment for diagnostic interpretation or intervention recommendations. There is much more to the structure of an ACO, but communication and the absence of silo-type operations is a main hallmark of this service delivery system.

Medical Home
The medical home model is actually a throwback to the 1960s and pediatrics. With this model, the PCP is the medical manager, patient advocate, and coordinator and interpreter of services. The PCP is responsible for referrals and for bringing members of other health care disciplines into a team structure. This is not intended to be like the HMO "gatekeeper" of the 1980s but, rather, a true advocate and coordinator of services on the patient's behalf.

Future Insights

How audiologists identify and market ourselves in this changing health care climate will be important determinants of our place at the table. Marketing of audiology services will need to be focused on the unique knowledge, skills, and services we bring to the table that are not duplicated by other health care disciplines. We will also need to market ourselves regarding the value of our services relative to patient outcomes. All health care disciplines are being pushed to control the cost of care and, at the same time, achieve far better outcomes in an effort to improve the overall national ROI.

This article intentionally has not discussed the finer aspects of reimbursement, coding, or documentation. What has been highlighted is a broad array of factors influencing the cost of health care—factors that are responsible for Congressional and federal agencies' reactions and the downward pressure on reimbursement. There is growing consensus among health care economists that the way both physicians and non-physicians practice, clinical decision-making, and the role of the patient in health care decisions will change dramatically from what we have known for many years. The comfort and familiarity of how we have done things for the past 30+ years will become a distant memory as we venture into new territory, new models of service delivery, and new models of reimbursement.

Robert C. Fifer, PhD, AuD, CCC-A
Vice President for Audiology Practice, ASHA
Associate Professor
Director of Audiology and Speech-Language Pathology
University of Miami Health System
Mailman Center for Child Development

About the Author

Dr. Robert Fifer, PhD, AuD, CCC-A, is the director of audiology and speech-language pathology at the Mailman Center for Child Development in Miami, Florida. He currently serves on the ASHA Board of Directors as the vice president for audiology practice. Previously, he was a member of ASHA's Health Care Economic Committee and the former audiology representative to the American Medical Association's Health Care Professionals Advisory Committee.  


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ASHA Corporate Partners