Why Study Health Economics?

The models and theories of health economics—and the research they have spawned—are useful to nurses. Like a mirror or guidepost, understanding health economics helps the nurse make sense of the often convoluted, paradoxical, and invisible yet pervasive ways economics shapes the organization, financing, and delivery of health care. Moreover, many of the policy decisions at institutional, state, and federal levels relate to economic incentives and how the money flows through the system. Thus, to serve patients and help shape a world in which the holistic, patient-/family-/community-centric vision of the profession of nursing can become a reality, nurses need a confident command of economic terms and ideas and to be able to apply them in the practice setting.

Yet for many of us nurses, the interpersonal aspect of the nursing role—taking care of people and building relationships—is precisely what drew us to the nursing profession in the first place. Economics, with complex mathematical formulas, nuanced theories, and interfaces with systems-level finances, can seem far removed from the working knowledge, concerns, and everyday work life of the nurse. Nevertheless, the field of economics and the profession of nursing share key interests.

What Sort of Things Do Economists Think About?

Some of the most pressing issues of economics are also issues nurses face every day. For example (adapted from Kernick, 2003):

This latter question is of particular importance to nurses as well as society at large, as it relates to social determinants of health such as educational level and socioeconomic class.

How Is Health Care Financed in the United States?

The U.S. health care system also has several different mechanisms by which funds for health services are obtained. These U.S. health financing options include out-of-pocket money at the point of service from those who use health care, taxes, and insurance premiums (see Figure 1.2). Each of these is discussed in greater detail, but for now it is important to simply distinguish the difference between health financing and health economics; health economics is a broad term that refers to overarching questions about the allocation of scarce resources, whereas financing is a narrower term that relates to how the money for services is generated in the first place.

Figure 1.2

Financing of health care in the United States.

What Is a Payer?

Although payers reimburse providers for the health care services they provide, the process is different than for other goods and services because the payer is an intermediary between the user of the services—the patient—and the provider of the service, such as the doctor, hospital, nurse practitioner, or home health agency. Although nurses provide services, typically the term provider references those who are reimbursed by a payer, such as doctors and hospitals. This rather odd situation is largely the result of the historical evolution of employer-based health insurance and is detailed in Chapter 2.

Payer Mix

Payer mix refers to the combination of different payers any one provider may be reimbursed by and the proportion of each. Different financing mechanisms have funds bucketed into different payment vehicles, that is, different payers. These can be considered insurers, so let us look more carefully at what the term insurance coverage really means.

Commercial Insurance

Commercial insurance is insurance that an individual or business can purchase. Common examples include state-level programs like Blue Cross and Blue Shield and national companies like Aetna, to mention just two. In the United States, these commercial insurance companies can be nonprofit or for profit; for-profit companies have the expressed mission of returning financial dividends to stockholders in the company. Nonprofit companies also intend to make a profit, but these must be retained by the organization to support self-preservation, growth, or new initiatives. In the case of a non-profit company, that extra revenue is termed a surplus rather than a profit. Unlike for-profit companies, nonprofit companies do not have shareholders.

Governmental or Tax-Funded Insurance Coverage

Medicare and Medicaid are tax-funded insurance coverage programs. They are federal programs, but with many differences. Medicare is overseen at a national level, meaning states have little say in how Medicare operates within the state. Medicaid is a federal program administered at a state level. Both have specific inclusion criteria. Medicare is a system of insurance coverage for those older than 65, whereas Medicaid is a program for poor and some disabled individuals. Medicare is finance via a federal payroll tax, whereas Medicaid is a mix of state and federal taxes. Together, Medicare, Medicaid, and the Children’s Health Insurance Program (CHIPS) represented 22% of the federal budget, or $772 billion, in 2012. Nearly two-thirds of this was Medicare (Centers on Budget and Policy Priorities, 2014). Given these percentages, it is easy to see that our government is heavily involved in (a) financing health care and (b) playing a major role as payer. Thus, the next time you hear someone say “Government has no place in health care,” you can sagely respond, knowing that our government is deeply involved in U.S. health care as a financier through taxes and as a payer through Medicare, Medicaid, CHIPS, and TRICARE, the program for military dependents and military members using health care services not available through other means.

Payer Mix and Cost Shifting

Each of these payers reimburses providers at different levels. Medicare theoretically reimburses at cost, whereas Medicaid reimburses below the cost of service provision. The numbers and proportions of individuals on Medicaid vary from state to state. This is because states have jurisdiction over the level of poverty at which an individual is eligible for Medicaid coverage. One state may start to cover individuals at 133% of poverty, for example, meaning that according to Federal Poverty Level (FPL) Guidelines, the person would need to make $1,293 or less to be eligible for Medicaid. Another state may be more generous, allowing a person to make up to 300% of the FPL, or up to $2,918,¹ and still be eligible for Medicaid benefits. This difference impacts the proportion of Medicaid-supported patients the delivery setting will see and treat. This proportion matters: No organization can consistently lose money, pay its employees (including nurses), and ultimately stay in business. If Medicare is a primary payer for a large number of patients in a given clinic, for example, that clinic may need to seek and treat a larger number of patients with commercial insurance, which pays at a higher rate than Medicaid and Medicare for the same services, and thus balance the clinic budget. It is also the reason payer mix is so important to any provider. A setting with more commercially insured patients and fewer Medicaid-insured patients will have a more robust financial situation than one with the obverse situation. This phenomenon of higher reimbursement from commercial insurance to offset the lower reimbursement from Medicare and Medicaid has the curious name of cost shifting, even though it is not cost that it shifts but charges. Understanding cost shifting can be very difficult for the lay public because it seems illogical that one payer would reimburse so differently than another for the exact same service. Because understanding cost shifting is so important to understanding commercial insurance rate hikes, it is discussed in more detail shortly. First, however, it is important to take a deeper dive into insurance and how it works.

A Simple Example to Illustrate How Insurance Works

To illustrate, imagine two scenarios. In the first, you are uninsured. You are in a small accident, and the cost of your care is $1,000. You are responsible to pay the full $1,000 to those who treated you. These providers of health care may be hospitals, physicians, nurse practitioners, or others, such as physical therapists. In the second scenario, you again have an accident resulting in a $1,000 charge, but this time you are in an insurance group of 1,000 people. Now the risk is shared by everyone, and hypothetically each person’s contribution to your care is a mere one dollar. Health insurance, although a bit more complicated, works exactly like this in concept, except that the payment from each member of the group does not happen individually at the time of your accident. Instead, it happens in the form of a monthly premium, with the term premium referring to the amount each member pays to the insurance company each month. The insurance company then, in turn, doles out reimbursement for services to providers. If there is a great deal of use of health care services, or a few members are receiving a great deal of very high cost services, the insurance premium for the whole group will go up the next year. The insurance company uses the cost experience of the group to determine the likely amount of money needed in the next year. In short, insurance premiums mirror the underlying cost of care for individuals within the group insurance plan.

What Factors Impact Cost Within a Risk-Sharing Arrangement?

The size and nature of the group that is sharing risk matters. In a large group, there are simply more people among whom risk may be spread. Again, by way of illustration, imagine a hypothetical group in which there were only three people. In this small group, there are not many people among whom the costs of care can be spread. Therefore, in general, a larger insurance group, such as employers with many workers, will be able to have lower monthly premiums, more covered services, or both because there are more people to spread out this uncertain risk.

The health status, age, and other aspects of members of the pool also impact the cost of care for individuals in the insurance group and so ultimately also impact the cost of their insurance premiums. This concept is familiar. Here are examples from automobile insurance:

This is an example of what is called experience rating, where your individual history directly impacts the cost of your insurance. It can also impact you because you are a member of a high-risk group.

Experience rating is one approach to risk appraisal. The second is community rating. In experience rating, ill individuals pay higher premiums than well individuals. In community rating, ill groups pay higher premiums than well groups. Health insurance plans using experience rating will charge higher insurance costs for older, sicker individuals than for individuals who are younger and well. Similarly, individuals who are in high-risk occupations would have higher premiums. Unlike experience rating, community rating redistributes charges evenly throughout the group insured. Community rating charges all individuals in the same group the same premium cost, regardless of their age, gender, occupation, or other factors that impact health. Thus, cost increases for an individual reflect the group experience over the previous year.

Which is better: experience rating or community rating? Although on the surface it may seem logical that those who are well have less expensive premiums than those who are not, experience rating results in more expensive premiums for those who most need health care. Recall that the foundational premise of health care insurance is that it redistributes funds by human need; community rating does this more consistently than experience rating (Bodenheimer & Grumbach, 2012). Community rating evens out the insurance charges throughout the group, meaning that some well people will have higher costs than they would in experience rating, as they are carrying the cost of others. At some point, however, it likely will be their turn, and others will carry the cost of their care. Some states have passed laws to assure that only community rating or modified community rating will be allowed within the state.

How Else Does Health Reform Impact Financial Access to Health Care?

The ACA of 2010 is a national health insurance program that requires all citizens to be covered by one or a combination of the forms of insurance coverage listed in Table 1.1 and thus is a hybrid financing model with multiple payers. Individuals who are not covered by Medicare or Medicaid are required to have commercial insurance. This requirement is termed a mandate. There are two types of mandates in the ACA, employer mandates and individual mandates.

What Does The Health Care Exchange Do?

Comparing health insurance plans can be confusing. Therefore, to be sure there are apples-to-apples comparisons, each plan must cover the same set of basic benefits. These basic, core benefits are termed essential health benefits (see Box 1.2). The essential health benefits also include some elements of prevention and screening that must be provided at no charge to the patient, meaning the financial disincentives to use these services have been removed (see Box 1.3). The definition of what services must be included is an important one; prior to this requirement, an individual may have purchased less expensive health insurance, only to find it was less expensive because it did not cover many services and left the person unexpectedly responsible for services he or she received.

Where Can a Nurse Direct a Patient Who Asks Questions About How to Navigate the Complex Terrain of Health Insurance?

Nurses are well-trusted health professionals, and patient education across a range of issues is a core competency of nurses. That said, the decision of which plan to choose can have enormous consequences for a family; nurses who are asked advice on health insurance should be prepared with the general knowledge heretofore described, but may—understandably and appropriately—still feel at a loss to provide specific direction. Fortunately, navigators have been trained to help people find their way through the health insurance exchange. Nurses can feel confident about referring patients who ask questions about the exchange to these trained navigators. Take a moment to determine where navigators can be found in your region. Some states are also attempting to create user-friendly exchange websites in which individuals can include personal information like income to readily determine which plan would offer them the greatest financial or other advantage, including subsidies or tax credits. Unfortunately, simple-to-use sites can be complex to build, and at the time of this writing, some states are struggling to make their sites fully operational. Take a moment to review the health insurance exchange website in your state.