Healthcare Econ 101 - Ep. 1: The Language of Money & Insurance Structures

Hi everyone, and welcome to Behind the Knife. I'm Nina. I am one of the chief residents at the University of Washington in general surgery, and I've worked with Behind the Knife over the past several years. Uh, and I'm super excited to join in, in helping with this new miniseries that we are doing, focusing on healthcare finance. In this series, we will take you through the basics of healthcare, finance, terminology, and insurance structures today. And then in future episodes, we'll dive into how physicians and hospitals get paid, and a little bit of how billing and coding work within our healthcare system. The leader of this series is gonna be Dr. Christopher Childers, who's a surgical oncologist at the University of Washington. Dr. Childers, can you tell us a little bit about yourself and what the impetus was for this series? Sure. Well, well, thanks so much for having me. I think that, you know, one of the things that we learn really well in residency is how to take care of patients and how to operate. And one of the things that we learned really. Poorly is everything else associated with a surgical practice. Um, especially kind of the business side of things and the financial

side of things. And I haven't really been able to find a good resource that is concise and covers kind of the basics of healthcare finance 1 0 1. And I thought that we might be able to do kind of a, a short three part series that covers some of those basics so that when you, you know. Finish training and go into practice. You're a little bit more well-informed, not just in terms of how the system works, but also to help, um, kind of advocate for yourself in this process as well. My background is I did my general surgery training at UCLA, I did surgical oncology fellowship at MD Anderson. At U-C-L-A-I, I spent three years in the lab. I got a PhD in health policy and management and, and my research focus has entirely been in the healthcare finance sector and specifically I've been very interested in the physician fee schedule and how physician payments. Influence decision making and, and potentially even patient outcomes. I do have a, a couple other hats that I wear that are,

that are relevant to this topic. I sit on the American College of Surgeons General Surgery Coding and Reimbursement Committee, uh, G-S-C-R-C for short. That's quite the mouthful. And I also serve as what's called the a CS advisor to the a MA Ruck, another bunch of jargon. Essentially the a MA is where decisions are made about CPT codes and the RVU that are assigned to them. The R is the committee within the a MA that helps make those, some of those decisions, and I serve as the advisor for the American College of Surgeons to that committee. And so hopefully I can provide some insight from those roles as well as we, as we dive into these topics. One thing I always find difficult is that, as you've alluded to, there's our medical knowledge that we've gained over years and years of training, but there's also this whole second world that we need to learn that involves the money behind medicine. And just like when I started out in medical school, I find the language used to describe this financial stuff to be part of the huge barrier to understanding it or even starting to dive into it.

It very quickly makes me feel pretty dumb when I start reading this stuff and can barely understand what I'm reading because I don't have the terminology to really speak the language. So, Dr. Childers, can you start by just explaining some of these basic terminology around healthcare finance? I hear words like cost, charges, revenue, and other terms used really frequently and somewhat interchangeably. And even as somebody who's kind of dabbled in this space, I feel like I often still get confused. So if you can give us an overview of how to think about these words, I think it would be a great place to start. Yeah, that's a, that's a great question. I think that. Just as we get bogged down in terminology in in medicine and for lay folks, they're like, we have no idea what you're talking about. I think the same thing happens for us on, on the financial side of things, and I think it really becomes a problem when you are going to negotiate that first contract, when you start actually being part of a system that has to look at things like revenues and expenses. If you don't understand that language, you're not gonna be able to be part of that

conversation and understand what's going on. So, so yeah, let, great place to start. So let's, let's start just very high level with what I think of as kind of the three main financial terms. And they have lots of synonyms, which is part of the reason why there's a lot of confusion. So charges, let's start there. Charges is what you are. Literally charging for a service. And so you have a patient that is undergoing an appendectomy. How much are you charging for that procedure? You have a patient that's in your office. How much are you charging for that office visit? Every hospital institution around the country is actually required to post their charge Master. This was actually something that came out of the first Trump administration was this requirement at the national level that every hospital has to post a charge master, and so these are available online. There's a few things that you should know about them. Number one, they are not required to be organized in any way, shape or form to be standardized from one hospital to the next. So what one hospital charges for

is what one hospital charges for. And so I've looked at some of these. I mean, it's fascinating 'cause you go to a, a county. Kind of a low resourced environment. They may only have a charge master that has a hundred lines on it. 'cause they might charge basically for a day in the hospital or an operating room hour. And they might have a few different kinda layers to that or a few different levels to that. And that might be the extent of what they charge patients for. Whereas you go to some other systems and they will have line items for. Tens, if not hundreds of thousands of different things that they might do in that hospital. Every Tylenol pill, every injection, there's no standardization for what a hospital is allowed to or required to charge for. So charges are what you're billing. It is can be listed in a charge master. Another terminology for this, which is confusing for many folks, myself included, is sometimes you'll hear this referred to as gross revenue, and we'll talk about the significance of that in a second. So that's. Charges.

And I think the best way to think about this, if we think about it from kind of a grocery store analogy, is what is the price listed underneath that box of pasta? Your mac and cheese, whatever it is, what is the actual price that in theory, you're charging for that item? Second level is how much somebody is paying for that service or that item. This goes by several terms. Reimbursement is one of them. The reason why we call it reimbursement is 'cause most of the time this is not being paid directly by a patient. It's being paid by an insurance company. And so that's why we often hear it referred to as reimbursement. The other term that you will hear for the amount that's actually being paid is revenue. Why do we call it revenue? Well, it's revenue too. Whoever it is that sold you that item or that service, so it's revenue to the hospital, and you'll sometimes hear that referred to as net revenue.

And so the difference between gross revenue and net revenue, this is very much an accounting concept, is basically how much you are sort of writing off between those two. And so this would be if you go to a grocery store. You might have a price tag for a box of pasta of 2 99, but it might be on sale for a dollar 99, and so you as the consumer are not paying 2 99, you're paying a dollar 99, and that's some sort of a markdown between those two. In healthcare, that markdown is most of the time related to the insurance company negotiating a slightly lower price for that item. All right. Third kinda layer to all of this, and kind of the third terminology that I think people should have a basic understanding of is how much does it actually cost to provide that service? And so a hospital, if they're doing an appendectomy.

They will have some sort of input costs to being able to deliver that service. And so that will be how much do we have to pay the nurses? How much does it cost for the supplies in the operating room? How much does it cost for the labs and the radiology? When the patient's on the floor, how much does it cost for the building and the overhead associated with all those things and the relationship between cost and reimbursement and charges. Is highly variable and you're not necessarily gonna be able to predict one from any of the other ones. And so you really have to be very explicit when you're talking about anything, healthcare, finance, about which one of these you're using. And oftentimes I hear people referring to cost when they're actually mean, how much a hospital is charging, and vice versa. They're referring to revenue and they're kind of mixing all these things together. And so. I hope that was kind of a fairly high level overview of those topics.

Any immediate questions about those or any other terms you've, you've seen? I think that makes sense. Let me take kind of a whack at it. I like your mac and cheese analogy because I, I like macaroni and cheese. Um, so charges are the price of your mac and cheese. It's what you charge for the service. It also goes by gross revenue. This is something that's set by and published by every single hospital in the country. Reimbursement is the price of your mac and cheese. Say if you brought a coupon in from your insurer, and that's what somebody pays for a service. Usually it's paid by an insurer. It also will go by revenue or net revenue. And then cost is like what it costs to manufacture the box of macaroni and cheese. And so that's the cost to provide the service to the person. And all this seems like there's a ton of variability and lack of standardization and, and you have to kind of imagine that this is. Some of why our health system is probably so complex as it is because this all seems very interrelated, but also variable. I think you nailed it. I love the mac and cheese analogy. Um, I think

the other thing that is important to know as somebody that's kind of done some research in this space, I think we, we like to think that these things are. Accurate and precise, and you assume when you've got, you know, $5 trillion being spent on healthcare, that we would have all these things really well organized and structured and, and they're not. So, as I mentioned, chargemaster not standardized in any way, shape or form. Figuring out how much an individual payer is paying for a service, not standardized in any way, shape or form. And then the cost thing is probably the most nebulous com component of all of this. Hospitals probably realistically have no. Real clue how much it costs to provide a service, because there's not the incentive to put in the effort to learn how to do that, because actually figuring out the cost, doing kind of these micro costing, time-driven, activity based costing techniques is extremely time consuming and labor intensive. And once you've done one service, you've done one service and it probably doesn't apply to the next service. And so hospitals probably don't really have a good

sense of how much things cost. And they're really giving you kind of the best estimate. So yeah, I think you nailed it on the head and hopefully that provides some language for us to move forward with the next conversation. One more question is how, who develops these, especially this cost factor of, of each hospital? Like, how's that decided? Who decides that? If it's that tedious and it's not really done based on any. Data in a lot of cases, which is what it sounds like you're saying, like, like who's responsible for that role? Every hospital's gonna do it a little bit differently, most likely. I've studied this in California hospitals. So California hospitals are probably the, the the best in terms of studying something that is a little bit standardized. 'cause the state of California actually requires them to submit financial statements annually and in a semi-structured format. And so having spoken to some people in finance in the past. Many of the hospitals in California will just use that structure to determine their costs, but the allocation of costs is still quite

loose. You might be able to figure out, you know, roughly how many nurses are hired by the operating room, for example, and you might have an idea of what supplies are purchased for the operating room over the course of an entire year, but trying to allocate. Other costs from the rest of the hospital, right? So all of the infrastructure costs that go into just maintaining a hospital, all the administrative costs of running of a hospital, trying to allocate those to an operating room is extremely challenging and, and somewhat subjective and. Further yet, trying to allocate those costs to something that we care about, like an individual patient or an individual surgery is extremely hard. And, and like I said, very labor intensive. And so, uh, it'll be up to every individual hospital on their capacity and their, and their interest to do so. My my sense is that most hospitals will spend a little bit more time focused on how do they maximize their net revenue. Because it's a little bit easier and

less time intensive than it is to try to figure out exactly the line item costs for an individual operation or an individual service. That's awesome. This will not surprise you that this is generating a million questions for me about how this all comes together at the end of the day. But now that we've got a little bit of that terminology out of the way, let's start with something else that's really fundamental to the United States Healthcare System Insurance. Uh, I think most of us are familiar with the broad strokes of the different types of insurance available in the United States, public, private, yada, yada. But perhaps we can dive into some of the details of what these things mean and how they all fit together. And let's start with one that I think all of us have heard about Medicare. Yeah. So super important. Let's, let's dive into some of the details about, about each of these insurance companies and some of the individual parts of each of these insurances. 'cause I think it is fundamental to understand where most of the dollars are are flowing. So let's start with Medicare and specifically I'm gonna start with Medicare.

Fee for service. Right? And that is gonna be a little bit distinct for Medicare Advantage, also called Part C, which we'll talk about a little bit later. So let's start with Medicare fee for service. And let's start with the first one, part A. So Part A of Medicare was introduced in 1965, which is not actually that long ago, about 60 years. Medicare was introduced as a. Insurance plan primarily for the elderly. And so to this day, Medicare is primarily serving patients who are 65 years and older. There are a few other populations that have been included, either at the outset or over time, have been added to Medicare, and so that includes patients who have permanent disability. Which is a little bit different than what a lot of our folks that we see in post-surgical settings, right? So this is not temporary disability. This is somebody that has been deemed kind of permanently disabled. A LS

was added as well as end stage renal disease. So those are, those are kind of the four populations. But by and large, you know, the overwhelming majority of the patients who are enrolled in Medicare are enrolled because they are 65 plus. Let's start with how. This gets paid and then what services it covers and how it works for patients. And we can do that for each of these components. So for Part A, this is hospital stuff is probably the best way to think about Part A. This is separate from. What we do as surgeons in terms of actually operating and taking care of patients. So it's really just on the hospital side of things. How does Part A get paid Part A gets paid through payroll taxes. And so when you look at your pay slip every month and you see that you've paid some amount to Medicare, that is paying pretty much exclusively for Part A. 1.45% of your pay, of your gross paycheck is going to Medicare Part A. Your

employer matches that. Dollar for dollars. So 1.45% is paid for by your employer and there's no cap on this. So if you make a million dollars or $500,000 or a hundred thousand dollars, you're gonna be paying 1.45% of that entire amount. There was something that was added later on, which was an additional Medicare tax. If you make currently over $250,000, um, as a married couple, you pay an additional 0.9% of that income. And so. Fun fact, for anybody that files their taxes, your Medicare and actually your social security tax, those are gonna be all taken care of by your employer. But if you make over that $250,000 cap, which many physicians and surgeons will, because that is entirely related to how much income you make, that will actually be something that you have to account for when you do your taxes. And most employers do not take out additional taxes. For that 0.9%

and so you can end up with a deficit if you're starting to make a lot of money. Alright, so that's how it gets paid for is through payroll taxes. It will cover hospital coverage, and we'll talk about the details of that in a second. Generally speaking, patients from their perspective, there's no premium for this coverage. They don't pay anything annually in order to have access to Medicare Part A because they have worked and contributed to Medicare. Their entire lives as by being employed. The cost sharing structure is a little bit unusual, and, but it is, it is relevant and I think that patients talk about this not infrequently, but essentially if you get hospitalized, you have to pay, uh, deductible. And then that deductible covers basically everything for that hospitalization and actually all of your care. Up to a period of time. And so for most

patients, they're gonna pay that deductible. They're gonna stay in the hospital for five or seven days, and that's gonna be the extent of it. Only if they were to stay in the hospital for a really extended period of time, or get readmitted multiple times over the span of several months, would they ever have to pay another deductible. So that's how it works. You get hospitalized, no premium, you do have to pay a deductible, and then that deductible lasts for several months. That's part A. Questions about that? No, I'm just really holding out for that period where I start paying that extra 0.9%. Someday you'll get there. You'll get there. Alright, that's part A, part B. This is the part that's a little bit more relevant to surgeons on a, on a day-to-day basis. 'cause this is what covers all of your physician services. It also covers some other things that covers things like durable medical equipment, some home health. This is not paid by payroll taxes. This is just paid out of general federal revenue. So if there are ever concerns about

the federal budget, then that potentially impacts Part B more so than it impacts Part A. For this one, this is an, it is considered optional for enrollees, and as a result of it, they do have to pay a premium and that premium is naturally not insignificant. It's a couple hundred dollars a month, and there's also a small deductible that's on the order of about 240 bucks. And the thing that's relevant, and I don't think many. Physicians really appreciate. The significance of this is that Medicare Part B has a 20% co-insurance and it has absolutely no cap whatsoever. So you see your physician in the office, and let's just say, I'm just making up numbers. That office visit is 200 bucks. The patient will pay 20% of that. They'll pay 40 bucks

and they will pay that. Every single time they see a doctor, they pay that 20% for every radiology study. They pay that for every outpatient procedure. Basically everything that is not inpatient care they will have to pay for. And so you can imagine that those co-insurance amounts can add up quickly if you are enrolled in only Medicare. Part B, and this is distinct a little bit from private insurance, which I think more people are familiar with, just because you get this through your employer as a physician, where most of the time you have some sort of out-of-pocket cap that does not exist for Medicare Part B. Alright. Questions about that one? Yeah. So just to put it clearly. So if I've opted into Part B, I would pay that extra $175 a month premium. And then if I get like an MRI or an outpatient visit that costs me $5,000, then Medicare is still only gonna pay 80% of that. In addition to my having to pay that

deductible, I'll have to pay that extra 20%. Yeah. Correct. Okay. Correct. Got it. And, and now keep in mind that Medicare, and we'll talk about this more later on in the series, Medicare has a, has very aggressive negotiated rates for a lot of these services, lower than most private insurances. But those numbers can still add up, especially if you're seeing lots of doctors in any given month, and especially if there's no cap. Yeah, that seems like it could add up really quickly. Okay, let's move on. More letters. Yep. Alright. We're skipping C 'cause we're gonna come back to that in a second. Part D is, was added to Medicare, uh, several decades later. This is prescription drug coverage that had historically not been covered by Medicare. A couple of things to know about this. It's actually not administered by Medicare, so part A and part B are. Totally administered by Medicare. This is actually paid for by, or it's administered rather by private organizations. Again, it's paid for by the General Federal Fund. It's not paid for by payroll taxes.

It has a premium similar to Part B. It's smaller. It's about $50 a month, but it depends upon which program you sign up for, and you're gonna have a variety of options depending upon which of those private organizations you choose to go through. And each of those programs will then dictate what the fee structure looks like in terms of does it have a deductible, does it have a copay? And you'll have kind of a tiered system depending upon how much you wanna pay for the premium versus the deductible and the copay. There's this concept that gets talked about quite a bit. Called the, the donut hole in, in Part D coverage. I don't want to get into to too many of the details of this 'cause frankly, it doesn't impact surgeons on a day-to-day basis all that much. But it basically, it was this, it was kind of this weird system where once you got up to a certain dollar amount that you had had covered during your, during that year, you then had to pay a hundred percent out of pocket until you reached this really, really high number and it left patients. Basically paying a hundred percent of their drugs for several thousand dollars. That has since been

largely closed. It's much smaller. They're still technically a donut hole, but it's, it's far less impactful on patients these days than it, than it used to be. But again, not something that most of our, our surgeons are gonna be bothered by all that much on a day-to-day basis. Got it. So a bad type of donut hole. Noted. Well, I think I've got that. That was a great overview and it's, it's kind of striking to me to see how much of this is still kind of variable. I mean, I, I feel like I have always thought of Medicare as this, like guaranteed thing where I hit 65 and I have it, but now knowing about part B and part D being paid for by the general federal government and, and therefore potentially it sounds like. Subject to, to funding cuts. That's a little bit of a scary prospect. So it's, it's just interesting to kind of hear how all of that lays out. Well, let's move on and talk about another system, which is private insurance. Yeah, let's, let's dive into some of the details and, and talk primarily about kind of the differences and, and the similarities with with

Medicare. So, private insurance, also called commercial insurance. These are kind of the big insurance companies that you've heard of. United Anthem, blue Cross, Cigna, Humana, Aetna, all of those. And this is the most common form of insurance to this day in the United States. And the reason for that is because it is almost always administered in the form of an employer sponsored benefit. This is a tax free benefit to employers, and therefore it is a somewhat cost-effective way of offering a benefit that at this point, most individuals now view as standard. If you're going to enter an organization with a large number of individuals. And you can also get it through the a CA marketplace and we'll talk about that a a little bit later on. But by and large, it's still gonna be something that you're gonna get through your employer. These companies will contract with your employer and they will typically offer a range of products, and you've heard a lot of this acronym soup for the different types of products that they offer. You've heard of

E-P-O-H-M-O. High deductible health plan. These are all different, different versions of private insurance. A PPO is typically something that has very limited restrictions on it, so you don't necessarily need a referral to go and see a specialist. You typically don't have a lot of. Out of network fees associated with it. Whereas an HMO is typically something that's considered more of a narrow network. So this is something where you do have to have a primary care provider to get referrals. There's probably a fairly narrow restriction on what's in network versus what is out of network. And as you might expect, the prices. For those plans reflect that underlying variability. PPO is generally more expensive. HMO is generally less expensive, and then there's kind of extreme plans such as high deductible healthcare plans. You've heard these referred to maybe as catastrophic plans. The idea being that you have a very high deductible. Because you're like, I'm healthy and I don't really plan on using healthcare unless I get into a car accident. At which point, if I

have to pay the 6,000 or $8,000 deductible, that's a small price to pay in order for my life to be saved. So why would I pay the numerous hundreds of dollars a month of a premium in order to be able to have access to somebody that I'm unlikely to use? So they'll offer a a range of plans. Again, as I said, the employer part of it is excluded from your taxable income, and so even though they might be paying 10, 15, $20,000 a year for you to be able to have insurance, you don't pay taxes on that, and so it is viewed as a desirable benefit for potential employees. You will typically also then make your contributions, which are usually only a fraction of the total amount of the premium in usually a pre-tax way as well. And so it comes out of your gross income and basically decreases the amount that you would have to pay taxes on. And so those are kind of the tax benefits and why it's become

so popular as with. Kind of all of these plans, there is gonna be huge variability from one organization to the next and which plan you sign up for. They're all gonna have different premiums, they're gonna have different deductibles, copay, co-insurance, out-of-pocket maxes, and you'll just have to kind of select which one you think is best for you. There's some data out of the Kaiser Family Foundation, which is a great resource for folks who are just interested in kind of health policy and, and just kind of numbers in general. Currently the average annual premium for a private insurance plan is on the order of about eight to $9,000 for an individual and 23 to 24,000 for a family, and employers are currently paying about 75 to 85% of that, which is why you might only be paying a few hundred dollars for your family in a pre-tax way in order to have access to insurance. So what are kind of some of the upsides and and downsides of, of private insurance? So upsides I think are a few. Number one is that they do usually

have this kind of out-of-pocket max. And so the idea that if you have some really bad year or some really bad incident where you rack up a lot of bills, even if you're paying a 10 or 20% co-insurance on each of those. Once you get to $8,000, you're done and you can just focus on recovering from whatever illness that you had to deal with. A lot of these insurance plans will also have kind of additional benefits that are not included as part of standard Part a Medicare. So it will cover office visits, it will cover prescriptions. You may be able to get dental or you know, optometry insurance as part of it. And oftentimes the, the copays that you're paying and the co-insurance might be substantially less. And so on a day-to-day basis, it feels like you're paying less for your insurance. But there are significant. Downsides to private insurance as well. Number one, it is certainly more expensive than Medicare. There's no doubt about that. Number two, there are often these kind of network restrictions,

especially if you're in an HMO or a high deductible health plan where you might have to go to your primary care doctor. Before you can seek a specialist, you may end up in this precarious situation where you have an in-network or an out-of-network provider, and you don't necessarily even know if you're dealing with an in-network or an out-of-network provider and, and the cost associated with that. The other big thing that people talk about a lot, which is primarily a, a private health insurance issue is pre author. Needing to get pre-authorization for expensive tests or expensive procedures. And in general, these programs are just more expensive. The premiums are higher. No doubt. The deductibles are often higher than what you're paying for in, in Medicare, part A, B, and D as well. So that's kind of the, the basics what, what questions come out of that. I think that's a great overview and uh, you know, I did some rough calculating while you were talking of those annual premiums 'cause I was thinking like $8,000 a year didn't sound terrible, but when you compare it to Medicare, even if

you, you buy into Part B and you're paying that extra premium, it's, it's like orders of magnitude different in, in how much that costs for for a person. So I feel like we definitely see that cost and. You see that in the numbers here? The pre-authorization thing I think is interesting because I, I feel like from a healthcare provider standpoint, we hear a lot about those painful phone calls that all of our attendings have to make to, to convince insurers that folks actually need surgery. And a lot of the argument I've heard for a system that allows people to buy private insurances for this like. Kind of freedom of getting healthcare that you want, but in a way, this also seems like a way that insurers do still kind of control what you can and cannot get from a healthcare standpoint. So I, I think it's just kind of an interesting concept there that we still need to get approval from some entity that's not, you know, just an individual choice or individual in their doctor's choice in by itself. Yeah, absolutely. The, the pre-authorization thing is, is, is a real issue. There's obviously

ongoing advocacy and legislative efforts to try to, to. You know, remedy and make that as as painless as possible. The other thing is that actually we're starting to see signs that even Medicare wants to start to do, sneak into the pre-authorization business there. There's kind of a pilot program going on right now where they're trying to test actually an AI system and whether or not it can serve as an a way to get pre-authorization for certain high expense Medicare services. So. It's, it's a challenge. It, there, it's a highly regulated space and, and we need more advocacy in this area, but it's a, it's a complicated topic. No, no doubt. Yeah, for sure. All right. Is this a good time to then go back to that, that last letter for Medicare and talk about Part C or Medicare? Yeah. Perfect. Perfect segue. Thanks for, thanks for that. So the reason why I think it's better to talk about Part C now. Because Medicare Advantage, it's ties to Medicare are lucid best. Medicare Advantage is essentially where the federal government

stays out of your health insurance, and really what they do is they just give money to private insurance companies that will then basically provide you with private insurance. It's a way of kind of flowing funds from your payroll taxes, from the general federal funds to private insurance companies to then provide Medicare Part C or Medicare Advantage. And so in this system, just to kind of spell it out as clearly as possible, if you're a patient, you are 65 or older, you automatically get Part A, you pay your Part B premium. Because you are getting kind of holistic Medicare at this point, and then the amount that is sort of set aside for what would normally go into part A and part B then gets funneled to private insurance companies as a, a kind of per member, per month amount. And then they are supposed to provide you with

insurance. It's obviously more complicated than even that, but there are a few things that I think are worth knowing. So number one. Medicare Advantage now enrolls more Medicare beneficiaries than Medicare fee for service does. This is a huge change over the last couple of decades, historically, Medicare fee for service was the dominant way that patients were enrolled in Medicare, and now it's over 50% are enrolled in Medicare Advantage. So that means that actually. Most people in this country aren't even, you know, we're just adding on top of what we already knew in terms of private insurance dominating the market. It's even more now because most Medicare patients are, are enrolled in a private insurance company. A couple other things that are worth knowing. Number number two is in general. Medicare actually funnels more money to private insurance companies on a per member, per annual basis than they do to Medicare Part A and part B. And that has to do with kind

of the algorithm that Medicare Advantage uses to calculate how much money goes to Medicare Advantage patients. There's a lot of research being done in this space. There's. Pretty decent evidence that shows that even though patients who are enrolled in Medicare Advantage are probably objectively healthier than patients enrolled in Medicare fee for service, they look worse on paper. And that's probably related to the fact that Medicare pays the Medicare Advantage Company based on how sick the patient looks, not necessarily how sick the patient is. There are other, there are lots of reasons patients wanna enroll in these Medicare Advantage plans. You see advertisements all the time. If you watch cable TV at this point, they'll all talk about enroll in your Medicare advantage. Plan, and they usually have some benefit, right? They'll say that you have no premium free drugs, free dental, we'll send you band-aids in the mail. Um, there's all these perceived advantages of being enrolled in a Medicare Advantage plan because these programs are trying to take it, you know, to,

to reap that money from Medicare. It's a pretty reliable source. There are some upsides for patients. There's no doubt about it. So they have a lot of the same benefits that we talked about for private insurance, so they probably have. Out-of-pocket maxes, they have probably lower copays. They might have a slightly lower deductible. They like the fact that they have access to all of these other services without having to pay for them. Kind of a la carte on a menu. But it has all of the downsides of being in a private insurance market as well. Now you're at, you have the network restrictions that are placed on you. You have the prior authorization issues, and I can tell you that from a. From a surgeon perspective, from a payment perspective, these Medicare Advantage plans typically do not pay as well as private insurance does on a typical employer based program. It's kind of like this, this fascinating mix between public and and private healthcare, so to speak. Speaking of, we've got one

more. Public major public insurer, and we've covered Medicare, both fee for service and now Medicare Advantage and also private insurance. But then the other big player obviously is Medicaid. So can you dive into the details on Medicaid? Yep, yep. Medicaid was introduced at the same time as Medicare back in 1965. It has always been, instead of it being a federally organized and administered product, it has always been a state federal partnership. The eligibility to be in Medicaid, enrolled in Medicaid has changed dramatically over the last 60 years. When it was initially introduced, it was extremely limited. It was basically just children disabled. It was tied to. Cash assistance at the time. So patients who were actually getting cash assistance were pretty much the only people who were eligible to get it. It has since expanded dramatically over time with the largest expansion actually happening during the Affordable Care Act, and now while

it varies from one state to the next. Essentially it can be offered to anybody other under certain kind of income limits. And so it no longer has any of these requirements for cash assistance and it being limited to to children, disabled and, and pregnant women. You've heard about Medicaid expansion. Medicaid expansion. Essentially just raised the income limit or allowed you to raise the income limit for who was eligible, and there are still 10 states that have not fully expanded. 40 states have. How does it get paid? And so states administer the program. It's run at a state level, but the federal government matches state spending based on what's called the fmap or the Federal Medical Assistance percentage. That FMAP was calculated in a kind of convoluted way, but when it was introduced, it was paying somewhere. Between about 50 and

80% of the cost of those programs. But when the Affordable Care Act went live, we allowed an expansion of Medicaid. We allowed more people to be eligible, and they increased that fmap, and it's currently 90% for expansion states. So. Currently, what does that mean? That basically means it's a one to 10 match between the amount that a state is pending is paying versus how much the federal government is paying. A couple other things. As a patient, it has some pros and cons. The pros are that it generally does not have premiums. It generally has very low or essentially negligible deductibles and copays as you might expect for a service that is being rendered to patients who have income limits. And there's actually federal protections

that maintain that those limits are kept at a very low level. The downsides are, are things that I think are well discussed providers maybe not accepting it, institutions maybe not accepting it, and so network restrictions are a real issue with Medicaid as a provider. The payments from Medicaid are generally very low and oftentimes, at least most institutions will say that it doesn't come close to covering the cost of taking care of those patients. And so that's why the networks are often limited for those. There's one other kind of little thing that you may hear about and, and I just want to very quickly touch on it just 'cause it's something that, that people talk about a lot with Medicaid is this concept of a provider tax. The high level concept here is that it's kind of a, a circuitous way for states to get extra funding from the federal government for their Medicaid program. And essentially what it is, is that the, that states will actually tax their hospitals, hospitals will give that money to the state.

The federal government will then match that money, and then, then the state will then give that money back to the hospital as higher reimbursement rates for Medicaid. It basically prevents, it basically is a way for hospitals to kind of. Support the really large cost of a Medicaid program because most state budgets can't support all of the cost of taking care of the Medicaid program. And so the hospitals help out with that process. But in turn, it means we get more money from the federal government, which in turn means they get reimbursed. More for those services. So it's a win-win from the state and a hospital perspective, but it's definitely a circuitous way. It's definitely come under a lot of pressure, and so you will often hear about it in the news as something that the federal government is interested in getting rid of or tailoring back in a lot of ways. So, is it correct to say that basically if you are a state that has not expanded Medicaid, you're, you're kind of leaving federal funding for Medicaid on the table in the form of that

like 90% federal medical assistance percentage and, and you're instead accepting this much lower. Standard for non expanded states, is that basically what they're doing? That's correct. Yep. Okay. Their FMAP is not at the higher level. That's fascinating. And, and do any states still restrict theirs so much to that, to the point where Medicaid is only eligible for just children and the disabled or, or have they all expanded at least to have basically a minimum income under which you can still get covered? And how wide is that variability? Yeah, I don't think I, I don't think federal law allows 'em to restrict to that degree anymore. It is primarily based on income at this point. It's just what that level of income is. That varies depending upon if you're in an expansion or non-expansion state. Okay, great. Well, I think we've covered all of the biggest players, but I, I do hear about some others from time to time and certainly come across them in some of. Database research that I've done. So tell us a little bit about the VA and TRICARE and Kaiser. Let's just quickly go through each of those. So Tricare, that is

for active duty military and their families and retirees from the military. A private insurance is probably the best analogy of it. It's only eligible to those individuals who ha are active duty military. Their families are retirees, and this is primarily a civilian based system. And so most of these people will go to private facilities. And so tricare, I would basically just view it as another version of commercial insurance. The VA, on the other hand, is exclusively for veterans. So if you're active duty military, this is a common. Thing that people mix up. If you're an active duty in the military, you don't go to the va. You're not eligible to go to the va, you have to use tricare. If you're a veteran, you are eligible to go to the va. With some other qualifying factors. The VA is a direct delivery system. It is not insurance. It's not like you say, I have VA insurance, I'm gonna go over to UCLA and get health. It is, I have VA eligibility.

I go to a VA and you can get your care through the va. Kaiser is the largest kind of integrated health system. Kind of a direct delivery system. It's kind of a one and all, both a provider and an insurer at the same time. It's huge, 13 and a half million people. It is funded by premiums that are usually sponsored by your employer if you're in a state that has a large Kaiser population, so West Coast, but others as well. They also will have access to some government funds. So Medicare Advantage. For example, one of the options might be to get your insurance through Kaiser. Again, you do have deductibles, you usually have copays, so it feels very similar to kind of in a private insurance system. There are a lot of pros of the Kaiser system. It's efficient. There's a lot of emphasis on preventative care. It's often very convenient for patients. There are obviously some, some downsides to the Kaiser system. Often the network is pretty limited. If they don't have

a service, you have to get referred out and there may be some wait times associated with being in one of these integrated health systems as well, but a very, a large player in the system as well. Got it. Okay. One last insurance related question. What. Is the a CA marketplace, how does that fit into all of this? And there was just a lot of conversation about a CA subsidies and, and are you able to dive in a little bit to, to what that was all about? Yep. So as the name implies, this came about as a result of the a CA. It is designed for individuals who cannot get or cannot afford insurance through their employer. So think gig workers, self-employed people, or people that work in small businesses. These people can go onto a website and they can buy insurance directly from a private insurance company. So this is private insurance. It's just an alternative way to purchasing it instead of purchasing it through your employer,

you're getting it through the marketplace. There have always been tax credits for people that have low-ish income, so something like 100 to 400% of the federal poverty line. The initial tax credits when this first came about were a sliding scale based on your income. So let's say your monthly premium was supposed to be $500 a month, and based on your income, they figured out it was supposed to be a hundred dollars a month. Well, what would happen is that you would pay a hundred dollars a month and the Fed would pay $400 a month to that insurance company to help subsidize your insurance. During COVID, things got a little bit awry and so they did some things where they kind of tapped the amount that you would have to pay out of pocket based on your income and

it very much, and it also extended those caps to people above. That 400% of the federal poverty line. And so this had a substantial impact on people who were kind of just above that 400% because they went from getting no help pre COVID to now getting a significant subsidy on that. And the subsidy was getting paid for by the feds. Those were extended in 2022, and then they were supposed to expire at the end of 2025. And so this was what all that kind of hub Baloo was at the end of 2025 was that these premium tax credits, these extended premium tax credits were about to expire. But to be clear, essentially all it. Happened. 'cause I don't think, as far as I

know there's any legislation that has passed to do anything about this is we're now just back into pre COVID days as opposed to anything that it has not impacted anything that originally came out of the a CA. That's interesting. And I think it highlights something that I've heard and talked with a few folks about, which is that there's this like. Terrible middle ground of like almost not being poor enough in this country to get support from the federal government in the form of Medicaid or, or some of these expansions on the marketplace. But then there's obviously also like the wealthy folks who can afford a nice private insurance plan that covers them well, and isn't this, you know, super high deductible. And so there's this like middle bar of people who are low-ish income, as you say. Who really kind of get trapped with no good options is what it, it seems like. And, you know, maybe that extension during the COVID period covered some of them in a way that they weren't previously covered. But that seems to have now gone back to, to what it was before the the

pandemic. Yeah, I think you, you hit on a, a lot of good points. Number one, most of these programs have just like threshold numbers, right? Like if you're 3 99, you get something. If you're 4 0 1, you don't get something, which is kind of a, a, a ridiculous way of, of structuring these things. What we didn't discuss is that. When you do have these kind of temporary changes to policy, so COVID makes it so it's something is more affordable. It's not just that, well, when you turn that off, things go back to the way they were. Things change in the marketplace when you have those changes in. Financial metrics, right? Insurance companies start increasing their prices of things when they know that patients are gonna be paying less out of pocket. And so then when you turn it off, that doesn't instantly go back in time. The insurance companies have now kind of built into their financial statements, this increased revenue, and they're not gonna just get rid of it all of a sudden. So yeah, I think you hit on a lot of the, the

political and policy challenges in this space. Yeah. O only, only scratching the surface, I'm sure. Well, I think we've covered insurance at this point. Something I've heard a lot in this space also is the concept of payer mix. What's, what's that all about? Yep. Good question. So, so now that we've covered all of these insurances, you now know everything you need to know in order to be able to. Understand payer mix. And so this is something that your division administrator is gonna be talking about a lot when you started in that first job. And payer mix is quite simply, what is the distribution of these different insurance companies among your patients. So is it predominantly Medicare? Is it predominantly Medicaid? Is it predominantly commercial insurance? And the reason why that matters is. Is pretty straightforward. Commercial insurance, as we talked about, tends to pay the best Medicare advantage, which is a pseudo commercial. Insurance pays less, but probably better than Medicare. And then lastly is

Medicaid, which typically pays the least for any one of these services. And so. When, and we will get to this in episode two when we start talking about compensation models. When you start thinking about how all of this translates into your salary, if you're getting paid $10 per RVU, and we'll talk about RVs as well, that's a very different situation than if you're getting 50 or a hundred or more dollars per RVU in terms of the financial stability of your department and your institution. Your payer mix is actually something that everybody can look up. It's not some proprietary information. Every hospital in this country is required to release their financial statements if they participate in Medicare, which is. The overwhelming majority of them, and that information is publicly available on Medicare's website. And so you can go on there and you can see how what proportion of patients discharges revenue come from each of these different insurers so that you have an idea of what your payer

mix is. Most hospitals will also start telling you your payer mix. Once you're actually a surgeon on faculty, they'll tell you. You know, 60% commercial, 20% Medicare, 20% Medicaid, or 3% cash pay or something along those lines. Very valuable thing to know if you're gonna have conversations with your department administrators. Yeah. I've got about 3 million follow up questions that hopefully we'll save for episode two, but one last big picture question before we close out today. Why, and this is just a really easy chip shot one for the end of the episode. Why is healthcare so expensive in the United States? Oh boy. Yeah, chip shot a, a couple of references and then I think it's easier to answer that question by what. It's not as opposed to necessarily what is causing it to be the most expensive. So a couple of references. Number one, Ashish Ja, who was the dean at Brown, he was also the COVID Czar during the Biden administration is currently in the middle of a Boston Globe series, and we can put a

link down at the bottom for, for the interested reader. He's, he's currently. Doing a series on why healthcare is so expensive in the United States, and it goes through all of the nitty gritty in terms of vertical and horizontal integration and consolidation and all of these kind of novel topics that we talk about. But one of the things that often gets cited, and I bring his name up because he wrote a really good paper back in 2018 in jama. Which I think is probably the best data that we have. That gives us some insight into why Big Picture healthcare is so expensive in the United States and it compares it to other countries. And so just for some high level numbers, 20 24, 5 $0.3 trillion is spent on healthcare in the United States in any given year. That's $15,000 per person. We're still growing at something like 7% per year over the last couple of years, which is far more than any other inflation index, CPI, medical, MEI. All of those things are much lower than that. But that paper that Ashish J wrote back in

2018, and they compared it to other kind of developed Western countries, and they looked at. Basically the inputs into their healthcare system, and they looked at potential drivers of why healthcare in the United States is so expensive and they found a lot of things that are not different between these countries, which I think is actually really worth pointing to. One of the things that we hear all the time is, oh, patients in the United States are just sicker. We have bad lifestyle. We're sedentary, we're obese. You know, that's the reason why healthcare is so expensive in the United States, and there's probably a little bit of truth to that. We do have higher rates of obesity than many other countries. We actually have like the second lowest rate of smoking though. And so when you think of coronary disease, when you think of lung cancer, which are huge burdens onto a healthcare system, we've got some things that are working against us, but we've also got several things that are working for us. So it's probably not explaining a large portion of why our healthcare is up to twice as much as some of these other countries. A lot of people blame the workforce like we have

more doctors, we have more nurses than any other country. And actually that paper showed that that's not true in the slightest. We have per capita the exact same number of physicians as any other country. We have the same number of primary care doctors as every other country. And similar on on the nursing front and other allied health professionals. People then say, okay, it's because we use more stuff. We do more. Office visits. We do more MRIs. We do more hospitalizations. And when you look at kind of high volume services, things that would actually impact healthcare spending, so things like just hospitalizations for COPD exacerbations or heart failure, you know, coronary artery bypass or orthopedic operations, like your big ticket items. We do them at the exact same rate as every other country. We're not utilizing twice as much as every other country. So it's not probably healthiness, it's not the workforce, it's not utilization. People talk about administrative costs, right? And so private insurance, all

these insurances that we just talked about or costly, we have a lot of administrators in the hospital. That's gotta be the explanation. And when you look at it in terms of a fraction of the amount that we spend in this country, it is way higher. There's no doubt about that. We spend something like 8% of total spending is on administrative costs as opposed to maybe one to 3% in other countries. But that percent value seems like a large difference, but numerically it's not accounting for twice the amount that we're spending. And so. The argument that I think still is true to this day is this pretty famous saying in healthcare economics from Dr. Reinhardt from a long time ago said it's the price is stupid. And it's basically the idea that we pay more for everything we do than every other country. It's not that we have more people doing it, it's not that we have. More of it

being done. It's that we just pay more for each individual service. And why is that? Well, it's a lot of factors, right? Nurses get paid more in this country than they do in other countries. Physicians, surgeons, we get paid more than we do in other countries, but also we have health insurance companies. That make a lot of profits. We have hospitals that make in Dr. Jaws words a lot of not-for-profits. They have a ton of operating revenue and our hospitals look real nice, right? You've got marble floors and floor to ceiling windows and those things aren't free. And so we just put a lot of things in that raise the price of the same services that are being done elsewhere. And so that is. The 30,000 foot view of what we do and don't know about why healthcare is so expensive in the United States. Obviously there's a ton of nuance in all of that, and we'll provide the links for people that are a little bit more

interested in diving into some of the details. I think this really dispels a lot of the mythology over the US healthcare system that I know I've heard over the last decade of being in it. And then you know, you also, it brings up questions over, yeah, physicians and nurses are paid more here potentially, but. We also probably spend a lot more on our education and, and the years that we have to put into that system and, and the debt that we incur as a result of all of that. And I think it all just snowballs into this, this wild system that we're all working in. So, um, thank you for that overview and for trying to tackle a question that could be a podcast series in and of itself in, uh, the last few minutes here. We've covered a ton of ground today and we've gone over some important terminology. Talked about insurance, and we've talked about the big picture of the US healthcare system, and specifically why spending in the United States is so much more than in other countries. Our next episode will focus on how this money flows from insurers to physicians and to hospitals. Until then, keep taking good care of patients

and working within your small part in this wild system and dominate the day.