Health Care Finance
Greaney
Spring 2013
I. Introduction and Context
a. Bodies of law necessary for Business Planning (and sometimes conflict w/ each other)
i. State and fed laws influence insurance regs
ii. Fraud laws (3): Stark, Fraud, Abuse
iii. Corporate law, NFP tax-exempt regs by IRS
iv. Anti-trust laws
v. Organizational arrangements
b. Plus financing- insurance laws, constraints on how providers operate
c. ACA attempts to harmonize all of these
i. May or may not make it easier to organize in health care
II. Regulating Health Insurance
a. Insurance matters! Guarantees access to HC services, relieves uncertainty for consumers and preserves assets, assures payment for providers, positive externalities for society (makes us feel better inside), redistributes care from health to sick, rich to poor, and younger to older
i. Increasing number of deaths each year associated with being uninsured (27k)
b. Insurance Concepts
i. Spreading risk and shifting risk
ii. Adverse and favorable selection
iii. Actuarial accuracy v. social insurance- actuarial fairness in ACA (tobacco and age premium cost ratios. Rest of regs are mostly social insurance)
iv. Medical underwriting (eg pre-existing conditions)
v. Moral Hazard- idea that you’ll use HC more because you have insurance
1. Studies show that having co-insurance puts us closer to “true demand”
2. Gladwell- getting HC is a hassle, so won’t seek it out just because we can. Preventative care isn’t wasteful, can’t measure quality and utility of HC like we can for other products, so there’s no real cost trade-off with co- pays, co-pays erroneously effect behavior. Go less likely if have to pay more, but just as likely to differ needed care as unneeded care.
c. ACA reforms: no lifetime/annual limits; coverage rescissions only for fraud or intentional misrepresentation; annual review by states or feds for unreasonable premium increases (no power to reject proposed premiums, meager state regs); internal and external review for coverage and claim determinations (supp143)
i. Underwriting: no health status underwriting (can’t deny preexisting conditions; supp127); premium variations are ok (individual v group plan, rating areas, age at 3-1, tobacco at 1.5-1; wellness programs are okay
1. Wellness programs: max reduction is 30%, requirements for if it’s based on a health status requirement and if unreasonably burdensome (supp129)
ii. Minimum Loss Ration: must spend certain percent of premiums (80% in individual and small group mrkt, 85% in large group mrkt) on payment for medical services or on activities that improve health care quality. Participants get a refund at end of the year if not met
1. Important because costs shouldn’t be shifted to profits. Insurance isn’t a competitive market because most is employer sponsored and employees don’t have much choice.
2. Issues: no definition of “health care quality,” where’s the line between admin costs/health care costs (ie brokers)
iii. Exchanges: market maker (sells plans and enrolls in Medicaid), regulator (certifies qualified health plans, supervising practices), administrator (distributes premiums subsidies, coordinates Medicaid and private markets)
III. Medicare and Medicaid
a. Medicare
i. Entitlement program; social insurance model; uniform benefits for all; uniform cost-sharing and premiums; access to all providers; link to other programs (disability under Social Security); BUT bit of antiquated structure (high copays, ltd catastrophic coverage)
ii. Intergenerational equity- amount paid it may not be proportional to the amount of services received once eligible. Puts an unreasonable burden on the next generation
iii. Means testing- if you’re better off, you should pay more and benefit less
iv. Fee for service/prospective payment system
v. Received most changes in ACA
1. Value based purchasing- moving away from fee for service, incentive payments to hospitals that perform well on submitted quality info (achievement score or improvement score, whichever is greater)
b. Medicaid
i. Welfare program; entitlement characteristics, but prefers ‘worthy’ or ‘deserving poor’; eligibility=need, link to poverty programs; political vulnerability; decoupling from welfare after TANF ’96; state/federal shared responsibility, financing
ii. Douglas v. Independent Living- California cut provider rates by 10%, Mediciad beneficiaries claim this violates Fed Medicaid statute’s ‘equal access guarantee’
iii. Changes in ACA: coverage for all adults under 133% FPL; enhanced federal funding for new eligibles; simplified enrollment processes (presumptive determination by hospitals
IV. Structure: Health Care Organizations
V. Choice of entity
a. For-profit corporation
i. Advantages: ltd liability for owners/shareholders; centralized management through BoD and officers; continuity of existence; easy transferability of ownership; ability to raise capital for business enterprises
ii. Disadvantage: possible double taxation (unless S-Corp)
b. Non-Profit Corp
i. Non-distribution constraint- surpluses must be devoted to entity’s charitable, religious, or other public purpose; must comply w/ 501(c)(3) to avoid tax
ii. Professional Corp
1. Similar legal rules as other corps, except: s/h aren’t shielded from personal liability of their own acts of prof. negligence of for the acts of others working under their direct supervision; only licensed pros can be s/h; BoD must be entirely or majority pros
iii. Partnerships- 2 or more co-owners
1. Unltd personal liability of all partners for debts; all partners have ability to participate in management and can bind partnership; no double tax\
iv. Governance and fiduciary duties
v. Significant difference b/n NFP and FP corps:
1. No shareholders in NFP. In FP, shareholders are owners
2. Both have BoD that has power to make decisions, can delegate power to officers to run the corp
a. NFP boards can be self-selected or have members elect
b. Members can have reserved powers, make decisions in lieu of BoD
3. NFP must be formed for an acceptable purpose- charitable, religious, educational- articulated in articles of incorporation/mission
4. Primarily governed by state corp law, intertwined w/ state and fed tax exempt law
c. Stern v. Lucy Webb Hayes- Plaintiffs were patients suing hospital directors and some financial
More states heading in this direction
c. Federal Requirements for Charitable Purpose-501(c)(3), p 977
i. Organizational Test- corp articles or LLC articles of organization, must limit its activities to exempt purposes
ii. Operation test- must be one of the enumerated exempt purposes (educational, religions, Charitable—usually used for hospitals, hmos)
iii. Operated “exclusively” for tax exempt purposes—primarily, no more than an “insubstantial part” of activities for nonexempt purposes
iv. No inurement- no distribution of net earnings in any way to benefit insiders
v. No private benefits- no payments to benefit private persons
vi. Political, lobbying and other restrictions
vii. Hospitals- New Section 501(r) (Supp 209-210)
1. Components: needs assessments; financial assistance policies (written, amount charged/generally billed to insurance cos; bill and collection restrictions)
d. HMOs under 501(c)(3)
i. IHC Health Plans v. Commissioner- HMO attempting to get TE status. offering services that promote health alone does not qualify for TE status. Benefits were limited to those enrolled in the plan, not greater community. Needed a “plus”—something more to qualify for TE status
1. Ins co tried to argue that poor people were paying less than they would have been if uninsured. Ct says that’s more like a discount and therefore not enough. Bit more strict of a standard than for hospitals
2. Could get 501(c)(4) status- no tax deductible donations or TE financing, but a catch-all category
3. IHC also attempted to argue an integrated delivery system, parent corp was NFP and they were a necessary part of the system. Ct disagreed because services could have continued w/o HMOs
e. Joint ventures b/n exempt orgs and FP entities (hospitals and docs)
i. Operate “exclusively” for exempt purposes under 501c3= engage primarily in activities that promote charitable purpose (no more than insubstantial amount is non-exempt)
ii. Exempt Orgs may joint venture w/ FPs, operate FP subsidiaries, etc.
f. Integrating Organizations and structures
i. Horizontal- dr/dr
1. Group practices finance- shared expenses only, shared risk
2. Group practice by type- single or multi-specialty
3. IPAs- K among independent docs, IPA negotiates Ks, doc continues own practice, management and UR may be thru IPA
ii. Vertical
1. PHO- jt venture b/n hosp and doc; PHO Ks with payors for hosp & docs; performs UR, credentialing, QA
2. Hospital acquisition of MD practices- employment K with docs
3. Management services org (MSO)
4. Integrated delivery system (IDS)- see IHC
