Last week I wrote an overview of healthcare in the US and discussed some of the history behind this massive industry. This week I'll be taking a deeper look some of the key constituents that make up our health system.
There are four main constituents in the medical industry:
- Patients - individuals who receive medical care from providers
- Providers - Institutions that provide care to patients, charge payers for that care, and buy products from vendors
- Payers - Institutions that pay providers for healthcare services, which includes insurance carriers, private employers, the government, and also individuals
- Vendors - Sell medical devices, pharmaceutical products, services and solutions to providers
There are certainly other important constituents, such as pharmacy benefits managers (PBMs) or benefits managers, but these four groups are the tent poles that define the healthcare industry. In particular, the interaction between patients, providers and payers, the 3 Ps as I call them, is most important (vendors are pretty straight forward in that they sell things directly to providers). Take a look at the image below to see how the 3 Ps interact.
Looking at each category in more detail:
The majority of healthcare in the US is paid for by two entities, employers and the government. Today, about 60% of Americans get their healthcare from their employer. Under employer-paid plans, employees may be required to contribute part of the cost of insurance while the employer is responsible for choosing the insurance carrier and negotiating plans and premiums. The government on the other hand covers about 33% of Americans through two main programs, Medicare and Medicaid. Medicare is a federal program that provides health coverage if you are age 65 or older, or have a severe disability, regardless of income. Medicaid is a joint federal and state program that helps with medical costs for people with limited income and resources.
While employers and the government bear almost all of the cost in the system, the actual "payment" often takes place through insurance companies. Insurers cover thousands or even millions of lives so that they are able to negotiate with healthcare providers for reduced fees and then pay for services. The four largest insurers are UnitedHealth, Kaiser, Wellpoint and Aetna.
Healthcare providers can be individual practitioners and small groups (i.e. primary and specialty care physicians), but most of our healthcare happens in larger hospitals and health systems. In terms of hospitals, there are non-profits (58% of all hospitals), for-profits (21% of all hospitals), and government (21% of all hospitals). We can also think about "provider networks" which include Health Maintenance Organizations (HMOs) and Preferred Provider Organizations (PPOs). HMOs like Kaiser are closed networks that won't accept out-of-network care unless in an emergency, and they act as both an insurer and a care provider. PPOs are stitched together networks that offer consumers more choice. Under Aetna's PPO, you pay less if you go to a provider in Aetna's PPO network, but you can go out-of-network if you want.
Patients are less complicated than payers and providers and so we won't go into much detail here. Patients are generally insured through their employer or the government, though they sometimes pay for coverage themselves. There are also many uninsured citizens in the US but that is quickly changing with The Affordable Care Act.
And Here Is What The Spend Looks Like
The California Health Care Foundation has a brilliant time lapse of the above data showing the shift in spend from 1960 to present day. Today, most of the health expenditures are concentrated in the hospital care, physician and clinical services, and prescription drug segments. As you can see, the government pays the most for these costs though they are closely followed by employers / private insurance.
The interplay between patients, providers, payers, and various other vendors seems pretty straightforward at surface level, but it becomes increasingly complex the deeper you go. These are massive spend buckets with a ton of inefficiency and fast moving regulations. Understanding the tangle of relationships and tracing the flow of spend is vital in understanding where the key issues are and how to go about solving them.