Running Head: HISTORICAL AND CURRENT ECONOMIC ENVIROMENT 1

Historical and Current Economic Environment

Amrit Virdee

University of San Diego

October 22nd 2017

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Health care expenditure in the US has been increasing over the years for example in

1950, health expenditures accounted for only 4.6% of the gross domestic product (GDP) (Fuchs.,

2012). In 2015 the health expenditure accounted for 17.8% of the GDP or $9,990 per person

(CMS., 2017). There is also a shift in the trend in who is responsible for paying health care

expenditures, for example in 1960, 77% of health care expenditures were paid for by businesses,

households and other private sponsors whilst governments sponsored the remaining 23% (Caitlin

& Cowan., 2015). This amount changed by 2013 where the government was sponsoring 43% of

health care expenditure. The rising costs are predominantly due to increases in hospital costs,

physician wages and drug prices.

Health care organizations (HCOs) are financially complex organizations which receive

their payments through various payment units, which is different from other business

organizations because a typical health care organization may have multiple contractual

relationships with various payers. The key distinction in paying HCOs is the payment unit of

which the five major ones include Historical cost reimbursement, Charge payment for specific

services, Fee schedules, Capitated rates and Bundled services (Cleverley & Cleverley., 2018).

As the government is becoming increasing more responsible for paying health care expenditures,

various legislative measures and in particular the Affordable Care Act (ACA) of 2010 prompted

key payment changes with the integration of quality based elements into the healthcare payment

structure. Quality based elements include the introduction of reduced payments to hospitals with

excessive readmissions, opportunity to gain back payments based on quality performance, by

shifting risk to the provider by determining a target price for clinical episodes and reduction of

payments for hospitals that rank lowest in avoidable hospital complications (Cleverley &

Cleverley., 2018).
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There are various components that affect the profitability, the ability to negotiate

reimbursement rates and efficiency of hospitals, for example there are financial differences in

HCOs that are privately or public owed as well as whether HCOs are investor-owned or not for

profit. Investor-owned hospitals generate the highest profitability (25%), followed by not-for-

profit hospitals (8%) and finally government hospitals (3%) (Turner, Broom, Elliott & Lee.,

2015). Other factors that affect profitability are whether the HCO has a teaching status, location

and critical access designation. Additional complexities include the fact that the US also has a

single payer system for patients predominantly over 65 (Medicare) and for patients below the

poverty line (Medicaid) which is federally paid.

Health care expenses are also affected by rising drug costs primarily because drug

manufacturers are not limited to price controls and can set prices on their products in order to

recover costs (Vega, et al., 2016). The increase of drug costs is also due to Pharmacy Benefit

Managers (PBMs) and hospital markups who’s aim is to improve profits. Reimbursement rates

for drugs have also been diminishing predominantly because of PBMs that serve as middleman.

PBMs use spread pricing where they can reimburse retail pharmacies at lower rates while

charging higher prices to plan sponsors as well as differences between the maximum allowable

cost (MAC) that pharmacies can claim and the real-market prices at which pharmacies acquire

their medications.
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References

Caitlin, A. C., & Cowan, C. A. (2015, November 19). History of Health Spending in the United

States, 1960-2013. From https://www.cms.gov/Research-Statistics-Data-and-

Systems/Statistics-Trends-and-

Reports/NationalHealthExpendData/Downloads/HistoricalNHEPaper.pdf

Cleverley, W. O., & Cleverley, J. O. (2018). Essentials of health care finance. Burlington, MA:

Jones & Bartlett Learning.

CMS. (2017, June 14). NHE-Fact-Sheet. Retrieved October 28, 2017, from

https://www.cms.gov/research-statistics-data-and-systems/statistics-trends-and-

reports/nationalhealthexpenddata/nhe-fact-sheet.html

Fuchs, V. (2012, March 15). Major Trends in the U.S. Health Economy since 1950. The New

England journal of medicine. 366. 973-7. 10.1056/NEJMp1200478.

Turner, J., Broom, K., Elliott, M., & Lee, J. (2015). A Decomposition of Hospital Profitability:

An Application of DuPont Analysis to the US Market. Health Service Research &

Managerial Epidemiology; 2. doi: 10.1177/2333392815590397

Vega, A. D., Meola, P. P., Barcelo, J. R., Ruiz, H. M., Oh, S. A., & Oh, T. (2016, April).

Commentary on Current Trends in Rising Drug Costs and Reimbursement Below Cost.

Managed Care. (4):41-9.