Question

Week 2 Project - Economics of Healthcare The National Health Expenditure Accounts (NHEA) estimates health care spending over time, including everything from health care goods and services to public health activities, government administration to health care investment. For this assignment, we will focus on health spending by major sources of funds. Please see below for a summary: Medicare: Medicare spending, which represented 20 percent of national health spending in 2012, grew 4.8 percent to $572.5 billion, a slight slowdown from growth of 5.0 percent in 2011. A one-time payment reduction to skilled nursing facilities in 2012, after a large increase in payments in 2011 due to implementation of a new payment system contributed to the slower growth. Medicaid: Total Medicaid spending grew 3.3 percent in 2012 to $421.2 billion, an acceleration from 2.4-percent growth in 2011. The relatively low annual rates of growth in Medicaid spending in 2011 and 2012 can be explained in part by slower enrollment growth tied to improved economic conditions and efforts by states to control health care costs. Federal Medicaid expenditures decreased 4.2 percent in 2012, while state and local Medicaid expenditures grew 15.0 percent—a result of the expiration of enhanced federal aid to states in the middle of 2011. Private Health Insurance: Overall, premiums reached $917.0 billion in 2012, and increased 3.2 percent, near the 3.4 percent growth in 2011. The net cost ratio for private health insurance —the difference between premiums and benefits as a share of premiums —was 12.0 percent in 2012 compared with 12.4 percent in 2011. Private health insurance enrollment increased 0.4 percent to 188.0 million in 2012, but still 9.4 million lower than in 2007. Out-of-Pocket: Out-of-pocket spending grew 3.8 percent in 2012 to $328.2 billion, an acceleration from growth of 3.5 percent in 2011, reflecting higher cost-sharing and increased enrollment in consumer-directed health plans. Source: Centers for Medicare & Medicaid Services. (2014). National Health Expenditure Data Highlights. Retrieved from https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/Downloads/highlights.pdf Download the National Health Expenditures [NHE] by type of service and source of funds, NHE2012.zip file. Summarize in a table the total NHE (in millions) for the following years: 1960, 1970, 1980, 1990, 2000, 2010. Present the data visually by creating a line graph or a bar diagram depicting changes in values. Comment on the changes in the categories of expenditure sources, i.e., out-of-pocket, health insurance, third party payers, etc. with respect to both year-to-year changes and across the entire period. Include specific interpretations of why such changes are apparent [social, political, economic, etc. factors] and what strategies may be necessary to curb healthcare expenditure in the coming years. To support your work, use your course and textbook readings and also use the South University Online Library. As in all assignments, cite your sources in your work and provide references for the citations in APA format. Submission Details: Your assignment should be addressed in a 2- to 3-page document. Submit your documents to the Submissions Area by the due date assigned.

Answer 1

Health Care Expenditures in the NHEA and the GDP Estimates The measures of health care spending in the NHEA and in GDP are broadly consistent with the System of National Accounts (SNA) and the System of Health Accounts (SHA).3 The SNA is a conceptual framework that sets the international statistical standard for the measurement of the market economy. The SHA provides a framework for producing internationally comparable accounts of health expenditures that are compatible with other economic statistics, including the SNA. The SHA defines health expenditures as follows:

Total expenditure on health measures the final use of resident units of health care goods and services plus gross capital formation in health care provider industries (institutions where health care is the predominant activity).

Activities of health care in a country comprises the sum of activities performed either by institutions or individuals pursuing, through the application of medical, paramedical and nursing knowledge and technology, the goals of: • promoting health and preventing disease; • curing illness and reducing premature mortality; • caring for persons affected by chronic illness who require nursing care; • caring for persons with health-related impairment, disability, and handicaps who require nursing care; • assisting patients to die with dignity; • providing and administering public health; • providing and administering health programmes, health insurance, and other funding arrangements

The definitions of health spending in the NHEA (Table 1) are, for the most part, consistent with the SHA. The structure of the NHEA is based primarily on the North American Industrial Classification System (NAICS) 5 for health care (sector 62). The NHEA are an invaluable tool for analysts of health care spending because they show the sources of funding for each spending category in Table 1. For physician and clinical services, for example, the NHEA show the amount of spending financed by each of outof-pocket payments, private insurance, Medicaid, Medicare, other government programs, and other private funds. The primary goal of the NHEA is to measure total health sector spending in a comprehensive and consistent way that allows for analysis of spending for health care goods and services and the sources of funds that pay for that care. Similarly, BEA works within the general framework of the SNA to produce internationally comparable estimates of GDP, which measures the final demand for goods and services produced in the U.S. GDP is the sum of personal consumption expenditures (PCE), gross private investment in equipment and structures, government consumption expenditures and gross investment, and net exports. BEA identifies the portions of GDP that are health-related (Table 2). The GDP statistics on health care expenditures show how these expenditures fit within the entire U.S. economy. The NIPAs show funds from Medicare, Medicaid, and other government sources of funds for health care expenditures as part of government social benefits. Government social benefits are not directly included in GDP (they are reported separately); instead, these funds finance transactions that are part of GDP (such as spending for physicians). The NIPAs, unlike the NHEA, do not identify the sources of funds for each of the categories of health spending in GDP. The general definitions of health care spending in the NHEA and the GDP data appear to be well matched, and the NHEA and the GDP estimates of total health care expenditures are very similar (Table 3 and Figure 2). The two estimates consist of expenditures for a similar array of goods and services—the services of physicians and other medical professionals, dentists, home health care agencies, nursing homes, hospitals, and health insurers; goods such as prescription and non-prescription drugs and other medical supplies; investment in structures and equipment; and government health programs. A closer examination of the two estimates, however, (Table 3 and Figure 3) reveals more substantial discrepancies in categories of health expenditures that one might expect to be similar. NHE for hospital care is, for example, far higher than household consumption 4 expenditures for hospital services in the GDP data. NHE for other professional services is far less than household consumption expenditures for other professional medical services in the GDP data. Similarly, the NHEA and GDP estimates of expenditures for physicians, drugs, investment, and government spending all differ noticeably. These discrepancies may be surprising because in most instances the NHEA and the GDP estimates use many of the same data sources, such as federal budget data, the Census Bureau’s Economic Census and Census of Governments (COG), Service Annual Survey (SAS), Survey of Construction spending (value put in place), and Survey of Government Finances (GF), and data from IMS Health, Inc. on spending for pharmaceuticals. This reconciliation of health expenditures in the NHEA and the GDP statistics updates and builds on two previous efforts to reconcile the two accounts (Sensenig and Wilcox 2001; Ho and Jorgenson 2005). Sensenig and Wilcox (2001) describe the differences in the NHEA and NIPA estimates of spending for hospital and physician services from 1994-1997. This paper extends the work of Sensenig and Wilcox to reconcile the full range of annual health care expenditures from 1997-2008. Ho and Jorgenson (2005) also found persistent differences in the detailed health spending components of the NHEA and GDP health accounts and provided a plan for linking them.

Over 80 percent of health care spending in the NHEA and in GDP is attributed to health care services and goods. These include the services of physicians, other medical professionals, dentists, home health care, nursing homes, and hospitals; and goods such as drugs and other medical products. The estimates of spending for these goods and services differ in the two accounts for the following key reasons: • the classification of certain industries, goods, and services in the two accounts; • the treatment of government facilities and expenditures; • BEA’s adjustments to estimate final commodity demand; • the treatment of non-profit institutions serving households (NPISHs); and • the use of some different data sources and estimation methodologies. Classification of industries. Although the definitions of health care spending in the two accounts are broadly similar, CMS and BEA classify some expenditures in different ways. Some types of expenditures are “health-related” in only one of the accounts; as a result, discrepancies in estimates of total health care spending arise. Only BEA’s estimate of total health expenditures, for example, includes income loss insurance. CMS and BEA place some types of expenditures into different major categories of health care spending, creating discrepancies in these categories but not in total health care spending (Table 4). The sales of outpatient care centers are, for example, included entirely within physician and clinical services in the NHEA, but are split between physician services and other professional medical services in the GDP data. The treatment of government facilities and expenditures: Government-owned institutions directly provide some health care services to patients. Some of these government-owned health care providers, such as government-run health clinics and Department of Veterans Affairs (DVA) hospitals, are financed mainly through general government revenues. Others, such as state and local government hospitals, receive substantial revenues from sales to households or businesses as well as government outlays. The NHEA classify government outlays for these public health care providers with spending for the related health care industry (i.e., with hospitals). The GDP 6 estimates classify these expenditures as part of government consumption expenditures. This different treatment of government-run health care providers results in discrepancies in estimates of some categories of health care spending (such as hospitals). Both CMS and BEA, on the other hand, treat direct sales to patients of government facilities (such as sales of local government-owned hospitals) as spending for these services. In other words, whenever a person visits a local government-run hospital and pays for health care services (directly or through an insurer), both CMS and BEA include these sales as part of expenditures for hospital care.6 The two accounts have a slightly different treatment of expenditures financed by the major government insurance programs (Medicare, Medicaid, and CHIP). With few exceptions, the NHEA classify all of these expenditures, including waiver spending that is intended to improve the quality of life and reduce costly inpatient stays, as health spending. While these funds also generally pay for health-related spending in the GDP data, a portion of these funds may purchase services that BEA groups with nonhealth spending categories, such as social assistance. This different treatment of government insurance programs contributes to higher total health care spending in the NHEA. BEA’s adjustments to estimate final commodity demand. While the NHEA tend to measure the total sales of health care industries (such as nursing homes), the GDP data measure spending for health care commodities (goods or services), such as nursing home services. The expenditures for the nursing home care commodity, for example, differ from the total sales of the nursing home industry because the commodity sales include the sales of nursing home services from providers other than nursing homes (such as hospitals), and because the commodity sales exclude nursing home receipts for other commodities, such as drugs. BEA’s GDP estimates reflect many adjustments to move from the industry sales that are commonly reported in source data to commodity sales. In general, BEA and CMS produce comparable measures of aggregate health care spending, but tend to define detailed “health spending” by type of service in different ways because they have different core responsibilities. BEA measures spending for commodities partly because one of its main goals is to measure changes in the “real” or inflation-adjusted value of the final demand for current-period output (GDP). In the NIPAs, “final demand” refers to the expenditures of final users (such as households) rather than “intermediate demand” for inputs to production. To measure real GDP, BEA analysts measure spending by final users for numerous commodities and match commodities to relevant price indexes (which are generally defined for commodities)7 . A key goal of the NHEA is to measure trends in the revenue of health care providers (such as hospitals and nursing homes) and the source of funds that pay for that care. In the NHE, provider revenue includes patient, non-patient, and non-operating revenue. Consequently, the measures of health care spending in the NHEA are generally closer to estimates of industry sales. The NHEA, like the GDP data, are carefully constructed to avoid double-counting expenditures. The source data that BEA uses to make its adjustments to estimate GDP are most complete for “benchmark” years in which the Economic Census occurs. For these years, BEA’s benchmark Input-Output (I-O) accounts establish the benchmark level of GDP and show the domestic output of each commodity and its disposition as final demand or intermediate consumption.8 BEA’s adjustments, which are extrapolated to nonbenchmark years as well, generally differ from the estimation procedures of CMS and are a reason for the differences in estimates of health spending in the two accounts. A few of BEA’s adjustments are especially important for the reconciliation.

Non-patient revenue. In the GDP statistics, the estimates of final expenditures for health care commodities exclude the non-patient revenue of health care providers. Non-patient revenues, which are especially important for nonprofit hospitals and nursing homes, consist of capital gains, grants, philanthropic contributions, and revenues from parking lots, cafeterias, and gift shops. The NHEA include non-patient revenues because health care providers take these revenues into account when setting patient charges.9 Income-misreporting. Only the GDP estimates include an income-misreporting adjustment that extends the coverage of the Economic Census by correcting for the underreporting of income and for non-filing of tax returns (McCully and Payson, 2009). The correction is intended to produce a more accurate picture of total production and is relatively more important for small firms. Secondary products. Each industry produces a primary product and possibly additional secondary products. Physicians’ offices, for example, sell a primary product (physician services) and secondary products such as drugs. As explained previously, BEA’s I-O tables regroup secondary products with similar commodities to provide more homogeneous groupings of commodities.10 The NHEA tend to measure all revenues of a health care industry, with few adjustments for secondary products. Intermediate sales. The GDP and NHEA estimates both ensure that intermediate sales are not double counted, but may do so in different ways. In some cases the two accounts make similar adjustments: for example, both the GDP data and the NHEA count sales of the services of medical labs to hospitals as intermediate demand for the services of medical labs and part of final demand for hospitals. In other cases the two accounts make different adjustments. The two accounts, for example, have a different treatment of intermediate sales to government, which consist of payments by government agencies (such as DVA) to private facilities for the direct provision of health care. The GDP data classify these sales as government consumption expenditures, while the NHEA include these sales as part of the sales of the industry to which the private facilities belong. Adjustments to estimate final demand in non-Economic Census years. For the estimates of GDP in these years, the detailed data to make these adjustments from industry sales to final commodity sales are unavailable, so BEA tends to rely on extrapolations of the benchmark-year adjustments. These extrapolations are based on trends of an indicator series which is believed to reflect trends in final commodity sales that we cannot directly observe. In the tables of this paper, the “adjustments to estimate final demand” in nonEconomic Census years reflects this extrapolation and is the difference between BEA’s estimate of final commodity sales and industry sales, after removing other adjustments. The NHEA tend to incorporate fewer adjustments in Economic Census years. Because BEA’s indicator series and the NHEA estimates may grow at different rates, the discrepancy between the two estimates may increase or decrease in non-Economic Census years. Non-profit institutions serving households (NPISHs): In the GDP data, the large portion of PCE for services known as household consumption expenditures (HCE) consists of receipts from sales of services to households. The GDP data also report a second category of PCE for services that is not reported explicitly in the NHEA: final consumption expenditures of non-profit institutions serving households, or NPISHs.11 These expenditures are measured residually as gross output (the cost of inputs to produce the service, including compensation, depreciation, and intermediate purchases) less sales to households and other sectors and less own-account investment (construction and software produced by NPISHs for their own use). Final consumption expenditures by NPISHs measure the production of services provided to households without charge. To the extent that these expenditures are offset through non-patient revenue sources (which are captured in the NHEA) there may be no large material difference between the BEA and CMS measures of spending for the services of nonprofits. The different treatment of NPISHs can nevertheless lead to discrepancies in the estimates of total health spending in the two accounts. The non-patient revenue reported in the NHEA most likely reflects more than the gap between expenses and sales for one particular service. Also, final consumption expenditures of NPISHs can be less than zero if sales exceed expenses for the commodity, even when non-profits receive non-patient revenue.