University of MinnesotaThe Healthcare Marketplace

Medical Industry Leadership InstituteCourse: MILI 6990/5990

Spring Semester A, 2015

Stephen T. Parente, Ph.D.Carlson School of Management

Department of Financesparente@umn.edu

Lecture #1 Overview

• Course Overview– Syllabus

– Faculty and student introductions

• The U.S. healthcare marketplace: an introduction

Course Overview – Basic Info

• Instructor - Stephen T. Parente, Ph.D– Sparente@umn.edu

– Phone: 612-624-1391

– Office: 3-279 CSOM

– Hours: by appointment (usually on Wednesdays)

• Website: http://ehealthecon.hsinetwork.com/mili6990_2015.html

• Lectures: every Monday

Course Overview - Readings

• Set of readings that will be made available to you electronically.

• You may need to get articles electronically through the library.

• Additional material may be handed out in class.

Course Overview - Units

1. Historical Overview of the Healthcare Sector

2. Physician Services Market

3. Hospital Services Market

4. Insurance Market

5. Medical Devices and Pharmaceuticals Market

6. Healthcare Information Technology Market

7. International Healthcare Markets

Course Overview - Units

• Each unit will include:– Introductory lecture

– Research and practitioner findings

– Emerging trends and market drivers

Student Evaluation

• Market Sizing Memo (20%)– Data driven, Entrepreneurial/venture perspective

– Due on 3/6/2015 at 4pm (or sooner)

• Midterm Exam (25%)– In-class, closed-book, closed-note, 2/25/2013

– Mix of definitions, short answer, and essay questions

– No make-up exams given unless pre-approved by an instructor.

• Market Opportunity Research Paper (45%)– 1 page topic proposal due on 2/16/2015

– Final paper due on 3/9/2015, by 4pm

• Participation (10%)

Market Opportunity Research Paper

• Your choice of a specific health care market-oriented topic.

• Identify a market opportunity in the medical industry.– Describe its history– Describe opportunities and limitations– Expand on an opportunity to affect this market that is:

• Financially sustainable• Profitable for innovators• Cost-effective (from a societal perspective)

• Paper could provide starting point for your MILI MBA specialization application (to be described later).

• Logistics– 12 point font; 7-8 pages of text

• Due Dates– Proposal: 2/16/2015 – Sizing memo: 3/6/2015– Final paper: 3/9/2015, 4pm latest

Contractual Responsibilities

• Student– Attend lectures – Engage in discussion– Learn by personal reading and investigation of

research topic of choice

• Instructor– Be prepared for lectures– Listen to students– Provide an exchange for ideas

Questions?

Introductions

• Name

• Year/program

• Graduate school focus (e.g., finance)

• What do you hope to do in 5 years?

• Any specific healthcare interests/issues that are important to you.

• What’s the most significant contact you or a family member had with healthcare?

An Introduction to the

U.S. Healthcare Marketplace

Physicians

Congress Main Street Biotechnology

Courts

Federal Government

<90% Income

Insurers 99% Income 91-99% Income

Big Business

Hospitals

Stakeholders

• Consumers• Providers– Hospitals– Physicians and Clinics– Long-term care facilities (e.g., nursing homes)

• Pharmaceuticals, Medical Device, Biotechnology firms

• Insurers• Employers• Government

Healthcare Triangle

Cost

Quality

Access

How much do we spend on health care?

• $2,900,000,000,000 in 2013, which is equivalent to $9,354 for each man, woman, and child (310 million) in the United States.

What factors drive health care spending?

Distribution of US Health Spending

Source: AHRQ, 2012

Distribution of Health Spending

% of U.S. population ranked by expenditures

1977 1987 1996

Top 1% 30% 28% 27%

Top 2% 41% 39% 38%

Top 5% 58% 56% 55%

Top 10% 72% 70% 69%

Top 30% 91% 90% 90%

Top 50% 97% 97% 97%

Source: NMCES, NMES, MEPS, Berk and Monheit (March/April, 2001)

Distribution of National Health Expenditures, by Type of Service (in Billions), 2010

Note: Other Personal Health Care includes, for example, dental and other professional health services, durable medical equipment, etc. Other Health Spending includes, for example, administration and net cost of private health insurance, public health activity, research, and structures and equipment, etc.

Source: Kaiser Family Foundation calculations using NHE data from Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group, at http://www.cms.hhs.gov/NationalHealthExpendData/ (see Historical; National Health Expenditures by type of service and source of funds, CY 1960-2010; file nhe2010.zip).

NHE Total Expenditures: $2,593.6 billion

Nursing Care Facilities & Continuing Care

Retirement Communities, $143.1 (5.5%)

Trends in US Health Spending Growth

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

1966 1971 1976 1981 1986 1991 1996 2001 2006 2011

Health Spending Growth in Excess of PGDP With Component Effects

hospital physician prescription nh + hh + or other total net

Current Cost Driver in Health Care

Expenditures=Price*Quantity

International Comparison of Health Spending, 1980–2005

0

1000

2000

3000

4000

5000

6000

7000 United StatesGermanyCanadaFranceAustraliaUnited Kingdom

0

2

4

6

8

10

12

14

16

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

United StatesGermanyCanadaFranceAustraliaUnited Kingdom

Source: OECD Health Data 2007.

Average spending on healthper capita ($US PPP)

Total health expendituresas percent of GDP

Where Does the Money Go?

Where Does the Money Go?

Where Does the Money Go?

Where Does the Money Go?

Healthcare Triangle

Cost

Quality

Access

Quality

• Defined– “…the degree to which health services for individuals

and populations increase the likelihood of desired health outcomes and are consistent with current professional knowledge” (Institute of Medicine)

– “…doing the right thing at the right time in the right way for the right person and having the best results possible.” Agency for Healthcare Research and Quality)

• Clinical quality vs. consumer satisfaction

• Structure, Process, Outcome measures

Access

• “An individual’s ability to obtain medical services on a timely and financially acceptable basis.” (Jonas & Kovner)

• Influences– Availability of facilities and transportation

– Hours of operation

– Ability to pay

Healthcare Triangle

Cost

Quality

Access

Tradeoffs

Take-Away Points

• Many stakeholders in the U.S. system, each with its own interests and incentives.

• Increasing costs across all segments over time, with market-based and regulatory factors contributing to the degree of growth in each.

• Many expensive conditions to treat are chronic (long-lasting) rather than acute, and some are directly related to lifestyle choices.

• There are tradeoffs between cost, quality, and access.

Small Group Discussion

• Name three agents (other than patients) in the healthcare marketplace that are likely to be affected significantly by the current healthcare reform bills in the House and Senate.

• Are they the same?

• If the agents are the same, what are the differences in ‘policy prescriptions’?

Break

Future Healthcare Market Trends

• Integrated history of the 20th century healthcare marketplace– Market linkages

• Key issues for the 21st century– Demographics– Health & lifestyle

• Behavioral choices• Chronic illness

– Technology• Clinical technologies• Administrative technologies

• Confronting key issues: U.S. health system reform

Healthcare Marketplace

Physicians

Hospitals

Insurance

Medical Device

Pharma-ceuticals

Long-term care

IT

Government

Consumers

Employers

1900-1910

• Flexner report results in redefinition of medical education

• New technologies (e.g., radiology) and pharmaceuticals (e.g., Salvarsan 606)

• Federal government involvement in pharmaceuticals– Poison Squad

– Pure Food and Drug Act

• Long-term care provided in “rest homes”

1910-1920• World War I

• Antiseptic medicine reducing in-hospital mortality rates

• 1st attempt at National Health Insurance under Wilson administration

1920-1930

• Great Depression (1929)• Hospitals and doctors underutilized because

unaffordable to many• Origin of Blue Cross in Baylor, TX (1929)• Proliferation of pre-paid group practices (e.g.,

Kaiser, Group Health of Puget Sound)• U.S. Food and Drug Administrations (FDA) is

created (1930)• Veterans Administration (VA) Health Care

System formed (1930)

1930-1940

• AMA waged war on hospital-based group practices and other organized systems perceived to be “socialized medicine”

• Philanthropists and New Deal legislation subsidize academic medical centers and other hospital construction

• Hospitals and doctors continue to face underutilization due to poor economic conditions

• Federal Food, Drug and Cosmetics Act passed (1938)• Sulfa drugs discovered to treat conditions like

pneumonia• 2nd attempt at National Health Insurance legislation

1940-1950

• World War II • Development and use of antibiotics like penicillin• Hill-Burton Act of 1946 for hospital and nursing

home construction• Proliferation of employer-sponsored health

insurance due in part to wartime wage freezes• McCarran-Ferguson Act allows health insurance

to be regulated at the state, rather than the federal level

• VA growth • 3rd attempt at National Health Insurance legislation

1950-1960

• Post-WW2: national income increasing

• Massive increases in federal support for medical research

• Fee-for-service medicine and patient-driven competition by hospitals and physicians

• Employer-sponsored health insurance expansion with Revenue Act of 1954

1960-1970

• Genetics research begins (1962)• Health manpower legislation for educational

subsidies (1964)• Medicare and Medicaid passage as compromise to

national health insurance under Johnson administration– Significant effect on hospitals and physicians

• Shift from rest homes to nursing homes for long-term care

• Harris-Kefauver Drug Act – Promotes competition in pharmaceutical industry

1970-1980

• Medical arms race • Passage of the Health Maintenance Organization (HMO)

Act of 1973• Hospital inflation growing rapidly under cost-based or

retrospective reimbursement• Passage of Certificate of Need laws at the state level; rate

setting by state governments; creation of state and local health planning agencies

• Employee Retirement Income Security Act (ERISA) (1974) passes and exempts plans run by unions and single employers from state regulation

• Nursing homes become more widely available• Nixon proposes National Health Insurance, but legislation

does not get passed

1980-1990

• Public health crisis (HIV/AIDS)• Double-digit inflation creates impetus for

Medicare Prospective Payment System (1983)

• Technology and incentives create a shift from inpatient to outpatient care

• Waxman-Hatch Act passes to promote competition by generic drugs in the pharmaceutical market

1990-2015

• Public health issues– Increasing rates of obesity (30% by 2002)– Diabetes prevalence such as diabetes grow

• Clinton Health Security Act legislation fails (1993-94)

• Managed care penetration increases– Selective contracting and shift to payer-driven

competition– Significant entry and exit in the Medicare HMO

market.–Medicaid managed care

1990-2015

• Provider consolidation– Record mergers and acquisitions by hospitals and

physician groups– Managed care “nightmare”– Balanced Budget Act of 1997

• Cuts Medicare payment rates– Nursing shortages

• Pharmaceuticals– Medicaid prescription drug rebates imposed (1991)– PBMs – Direct to Consumer advertising permitted (1997)– Medicare Part D (2006)

1990-2015

• Insurance– Health Insurance Portability and Accountability Act (HIPAA) (1996)– Managed care backlash (1998-)– State Children’s Health Insurance Program (S-CHIP) (1997)– Medical savings accounts (MSAs) (1996), consumer-driven health

plans (CDHP) (2001), health savings account (HSA) legislation (2003)– Health insurance costs almost $10,000 per family or $4000 per

individual by 2004; uninsured numbers rise to 44 million; 2011 $15,000 per family, 50+ million uninsured

– Patient Protection and Affordable Care Act (PPACA) or ACA passes on March 21, 2010. Full implementation in 2014.

• Quality concerns– HEDIS quality measures of health plans first developed (1991)– Institute of Medicine reports on medical errors and patient safety (To

Err is Human; The Quality Chasm)– Leapfrog Group (1998)– HITECH Act (2009) dedicates 34 million for electronic health records

• Long-term care and shift toward senior housing

Physicians

Congress Main Street Biotechnology

Courts

Federal Government

<90% Income

Insurers 99% Income 91-99% Income

Big Business

Hospitals

Thought question: In what ways does the global healthcare marketplace influence the U.S. healthcare marketplace?

Health Care Expenditure Growth

Drivers of Expenditure

• Supply-side– Imperfect information• Increasing

monopoly thesis (Pauly and Satterwaite (1981)• Quality information

– Technological change

• Demand-side– Insurance• Tax treatment

– Demographics• Aging

– Preferences for Technology

– Health behaviors• Obesity• Tobacco

Efforts to Control Costs

• Limits on hospital inputs

• Utilization management

• Rate-setting

• DRG-based payment

• Managed care

Key Issues

for the

21st Century

Population and Demographics

Health and Lifestyle

Technology

Production of Health

HEALTH

Demographics Genetics

Lifestyle and Health Behaviors

Medical Care

Demographics

Thought questions: Demographics

• How will the demographic shifts affect the market for physicians? Physician services? Hospital services? Long-term care?

• How will these demographic shifts affect younger generations?

• In addition to the population distribution, what other demographic or socioeconomic changes will affect health care markets? How?

Significance of Health Behaviors

• What is a “health bad”?– Concept– Examples

• Why do economists and others care?– Externalities: case in which a consumer

(producer) affects the utility (costs) of another consumer (producer) through actions that lie outside the price system; public price is not fully accounted for in the private price

–Market failure• Subsidies for positive externalities (flu shots)• Taxes for negative externalities (excise taxes on

cigarettes)

Consequences of Health Bads

• Smoking– Cigarette smoking is the leading cause of lung cancer (90% of deaths);

chronic bronchitis; emphysema (COPD), and a major cause of heart disease and stroke

– Associated with additional cancers (e.g., bladder, pancreatic, and cervical)– Vision and hearing problems and slowed healing from injuries– Responsible for 435,000 deaths per year in 2000

• Obesity– Linked to hypertension, high cholesterol, coronary heart disease, type 2

diabetes, depression, and various types of cancer– Responsible for 400,000 deaths in 2000– $75 billion in medical care expenditures in 2003

• Excessive Alcohol Consumption– Associated with lost productivity, disability, early death, crime, neglect of

family responsibilities– Motor vehicle accidents while driving under the influence– 100,000 deaths from alcohol abuse in 2000

For next week

• Read– Focus on:

• Starr (he did win a Pulitzer for it – after Harvard denied him tenure)• Physician entrepreneurship

• Watch about 1/20/2015 State of the Union Address:– Identify a medical industry business opportunity of interest

related to what could be mentioned in address.• How critical is government policy change to enable your opportunity.• If no policy change, what would be your Plan B.• Is you opportunity a win/win for your investors and society at large? If

so, how?– E-mail me your opportunity by Sunday afternoon (after the

Super Bowl).