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Healthcare Overview Association of Healthcare Internal Auditors John P. Mc. Guire May 7, 2008 Healthcare Overview Association of Healthcare Internal Auditors John P. Mc. Guire May 7, 2008

TOPICS § § § Healthcare Economics Payment Systems Profitability Assessment Business Strategies Performance Measures 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 Chart 1. 4: National Health Expenditures as a Percentage of Gross Domestic Product, 1980 – 2005(1) 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/National. Health. Expend. Data/downloads/benchmark. pdf.

=37. 4% =37. 4%

Chart 1. 5: National Expenditures for Health Services and Supplies(1) by Category, 1980 and Chart 1. 5: National Expenditures for Health Services and Supplies(1) by Category, 1980 and 2005(2) $234. 0 B $1, 860. 9 B 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 series (back to 1960). For more information on this revision, see http: //www. cms. hhs. gov/National. Health. Expend. Data/downloads/benchmark. pdf. (3) “Other” includes net cost of insurance and administration, government public health activities, and other personal health care. (4) “Other professional” includes dental and other non-physician professional services.

Four Myths of Health Care Costs 1. Healthcare costs are driven by greed. 2. 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 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) Operating Margins, (2) and Patient Margins, Chart 4. 2: Aggregate Total Hospital Margins, (1) Operating Margins, (2) and Patient Margins, (3) 1991 – 2005 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 Chart 4. 6: Aggregate Hospital Payment-to-Cost Ratios for Private Payers, Medicare, and Medicaid, 1981 – 2005 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 ü Reduced benefits/service level caps Medicaid Payment Remains Under Pressure Medicaid Affects Every Hospital ü Reduced benefits/service level caps ü Provider payment cuts ü 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 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 Employment. Based Coverage Non-Elderly With Employment-Based Coverage Unemployment Rate 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 The Long-Term Trend of Consumers Paying Less Is Reversing Consumer Out-of-Pocket Share of Personal Health Care Spending US Market, 1930 -2010 Medicare and Medicaid CDHC reverses decline in consumer share of costs Sources: Milliman & Robertson, Bureau of Labor Statistics, Sg 2 forecast

Adoption of Consumer-Driven Plans Continues to Accelerate Enrollment in Consumer-Driven Health Plans 2001– 2006 Adoption of Consumer-Driven Plans Continues to Accelerate Enrollment in Consumer-Driven Health Plans 2001– 2006 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. GM auto worker Sources: Inside Consumer-Directed Health Care; Wall Street Journal; Sg 2 Analysis, 2005.

The Access Project http: //www. accessproject. org/downloads/Hospital_Finance. pdf 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. Contrary to Popular Belief, Health Care Is Not Recession-Proof People will always get sick. They can, and do, defer care. People don’t pay for health care. Employers do, and increasingly their employees do as well. Health care always grows. The government will always be there. Yes, But Remember the 1990 s? 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 The Health Care Industry Moves in Cycles. . . Like Everything Else Yearly Growth Rate 20% Phase I Back to the Future 18% Phase II The Party Doesn't Last Phase III Growth Returns 16% 14% Consolidation and Retrenchment 12% 10% Projected Average Growth in Total Health 8% Care Expenditures 6% 4% 2% 0% 2001 2002 Sources: U. S. Department of Health and Human Services 2003 2004 2005 2006 2007 2008 2009 2010

The Next 10 Years: A Mostly Flat Inpatient Market Med/Surg Inpatient Discharges* US Market, The Next 10 Years: A Mostly Flat Inpatient Market Med/Surg Inpatient Discharges* US Market, 2005– 2015 Population-Based Forecast 16% 10% Sg 2 Forecast US Market Discharges 10% Patient Days 3% ALOS *Excludes neonate, normal newborns, obstetrics and psychiatry. Sources: Impact of Change v 4. 0; NHDS; Sg 2 Analysis, 2005. % Growth – 7%

Key Strategic Challenge: Finding Profitable Growth in a Flat Market Technology Leadership ? Geographic 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 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 % Change in Discharge Volumes *Bubble size represents DRG volumes in 2005. †Excludes neonates, normal newborns, obstetrics and psychiatry. Source: Impact of Change v 4. 0; NHDS; Sg 2 Analysis, 2005.

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

Chart 4. 3: Distribution of Outpatient vs. Inpatient Revenues, 1981 – 2005 Source: Avalere Chart 4. 3: Distribution of Outpatient vs. Inpatient Revenues, 1981 – 2005 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 Who Is Making Money in Health Care? Profitability Across Health Industry Subsectors, 2002 -2004 Medical Device Pharmaceutical & Biotechnology Health Plans Hospitals 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 A Big Construction Pipeline Is Still Working Its Way Through the System Acute Care Bed Construction at Different Stages U. S. Market, 1993 - 2004 1998: Turning point for new projects initiated Designed Broke Ground Completed 2004: Turning point for new projects completed

There Is More Good Technology than Any Institution Can Buy Brain. Lab = $8 There Is More Good Technology than Any Institution Can Buy Brain. Lab = $8 million ICDs = $30, 000 each 64 -Slice CT = $1. 5 – 2 million Da. Vinci robot = $1. 5 million

“There is no more delicate matter to take in hand, nor more dangerous to “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 Measuring Performance in Health Care Is Ambitious, Complex and Divisive Measures of Performance for Carotid Stent Procedure Infrastructure / Credentialing Satisfaction ü Patient satisfaction ü Return to Work ü Duration of Convalescence ü Quality of Life – Living at Home ü Convenience ü Patient Perception of Outcome ü Physician Satisfaction ü Scheduling ü Equipment / Staffing ü Efficiency Outcomes ü ü ü ü Efficiency ü ü ü Length of Stay (LOS) Procedure Time Expendable Supplies Post-Procedure Time Post-Discharge Care (<30 Day Repeat IP) ü Episodic Cost ü Hospital ü Patient ü Payer ü Longitudinal Cost 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 ü Interventional Lab: Road-mapping (fluoroscopy/digital flatpanel/high resolution/real-time) ü Staffing ü Nurses trained in dealing with slow heart rate, low BP, stroke, bleeding, etc. ü X-ray tech ü Physicians ü Cognitive: Patient Selection; Credentialing ü Experience: Minimum # of Volumes ü Complications Management ü Performance Improvement Program ü Tracking ü M & M Conferences ü Corrective Actions ü Improvement Process ü Candidate Screening/Selection ü Proper AMI Stroke ü High-risk for Surgery ü U/S, CT and/or MRI ü Informed Patient Consent ü Procedure Time-out ü Correct Patient ü Correct Side ü Post-Procedure Care: ü Dosage of Aspirin and Plavix ü Neuro Exam Follow-up

Patients See Performance Differently What Medicare Hospital Patients Care About Most Affordability = Quality Patients See Performance Differently What Medicare Hospital Patients Care About Most 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. Top Ten Issues for the Healthcare Industry 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 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 Report Card Fever Technology Backbone Labor Shortages 11. Source: Pricewaterhouse. Coopers

Recommendations of the Committee on the Costs of Medical Care 1. § § Both 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 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 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 § 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 “Never make predictions, especially about the future” Yogi Berra

Reference Material § A Community Leader’s Guide to Hospital Finance § The Access Project Reference Material § A Community Leader’s Guide to Hospital Finance § The Access Project § http: //www. accessproject. org/downloads/Hospital_Finance. pdf § Trend. Watch 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