Economic Dynamics of Health Care Delivery Models discussion help (chapter 7)

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Evaluating the Cost of Care
Learning Objectives
After reading this chapter, you should be able to:
•• Identify the factors that determine the true cost of care.
•• Identify the direct and indirect costs of health care.
•• Examine the concept of cost-benefit analysis related to the evaluation of a health care
program.
•• Examine the concept of cost-effectiveness analysis related to the evaluation of a health
care program.
•• Recognize programs that pass and fail cost-benefit and cost-effectiveness analysis.
•• Apply cost-benefit and cost-effectiveness analysis to health care programs.
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CHAPTER 7
Introduction
Introduction
Comparing data across studies and across organizations and programs is difficult because
each one measures information differently. For
example, one medical provider might measure
services by the number of patients seen, whereas
another might measure each billable procedure
regardless of the number of patients seen. How
do we determine which organization best uses
its resources?
First, we must determine what the true cost of
care is. For this, we need information on the cost
of supplies per service, the cost of physicians and
staff needed for a procedure, and the facility’s
cost per procedure. Once this data is tallied to
find a total cost of care, the data must be analyzed
to determine whether the money and resources
were well spent. By doing so, decision makers
can make informed selections regarding which
services to continue and which ones to revise or
discontinue.
Courtesy of Jochen Sand/Thinkstock
The expenses of several resources,
including health care personnel,
supplies, and facility, must be taken into
consideration when calculating the true
cost of a medical procedure.
Critical Thinking
Throughout this text, various statistics have been presented and discussed. For example, in Chapter 6,
you read that “Many women with incomes below 200% of the federal poverty level report not seeking
health care due to an inability to take off work during clinic hours.” Statistical data is gathered through
various resources, one of which might be the electronic health records mentioned in previous chapters.
Do you think that true costs can be better evaluated with this tool?
Self-Check
1. How might one organization measure costs?
a. by the number of patients seen
b. by counting every penny in the facility
c. by estimating the reimbursement amount from Medicare/Medicaid
d. by adding up the cost of every piece of medical equipment
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CHAPTER 7
Section 7.1 Totaling the Cost of Care
2. Which of the following should be assessed to determine the true cost of care?
a. the cost of the valet service
b. the cost of paving the parking lot
c. the cost of physicians and staff for a single procedure
d. the cost of medical lobbyists
3. Why is it difficult to compare data across studies and across organizations and
programs?
a. Each measures information differently.
b. Different researchers look at different issues.
c. Employee satisfaction varies widely.
d. Medical certifications are not the same everywhere.
1. a
2. c
3. a
7.1 Totaling the Cost of Care
T
here are both measurable and abstract
costs associated with any medical condition. Measurable costs are the direct costs
of treatment, including the price of pharmaceuticals and materials, such as bandages and sutures,
as well as the salaries of nurses, physicians, and
pharmacists. Direct costs can be measured by
totaling the financial prices of all of the resources
used to treat a patient. To a provider of a service,
these include costs related to property, plant, and
equipment. These costs are typically called “overhead costs,” and the cost of direct care is typically
inflated to include these costs. If it is tangible, it is
a direct cost.
Courtesy of Comstock/Thinkstock
The cost of caring for a medical condition
includes the expense of tangible materials
as well as more abstract expenses caused
by diminished productivity at work, taking
sick days, and so forth.
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Indirect costs are more abstract. The indirect
costs of an illness, for example, include lost work
hours, reduced productivity, and reduced family
involvement and civil involvement. For a patient
with a mental condition, fees paid to a psychiatrist are a direct cost; reduced work productivity
due to taking time off to see the psychiatrist is an
indirect cost. Both direct and indirect costs must
be weighed when determining resource allocation to care for vulnerable populations.
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Section 7.1 Totaling the Cost of Care
CHAPTER 7
Vulnerable Mothers and Children
The United States experienced a record-breaking birthrate in 2007 of 4,316,233 total births.
The slight economic surge in 2006 and 2007, which preceded the Great Recession of 2008
and allayed fears over an impending recession, is a contributing factor to 2007’s elevated
birthrate, as people are more comfortable growing their families during times of economic
surplus. The U.S. population also reached an all-time high of 300 million people in late
2006, and the enlarged population added to the following inflated birthrate. The 2007
baby boom was followed by a steady decline in 2008 and 2009, partially due to the Great
Recession that began in late 2008. The birthrate declined 4% from 2007 to 4,131,019 total
births in 2009 (Sutton, Hamilton, & Mathews, 2011). The live birthrate further declined 3%
from 2009 to 4,000,279 in 2010 (Hamilton, Martin, & Ventura, 2011).
The good news is that the numbers of births to teen mothers and preterm births also
declined between 2007 and 2010. The birthrate to females ages 15–19 fell from 42.5 births
per 1,000 women in that age group in 2007 to 39.1 births per 1,000 women in that age
group in 2009 (Sutton et al., 2011). While the preterm birthrate rose 20% from 1990 to
2006, this upward trend reversed in 2007. The preterm birthrate for 2006 was 12.8% of all
live births; the rate fell to 12.7% in 2007, and again to 12.3% in 2008 (Martin, Osterman, &
Sutton, 2010). This decline is important, as preterm babies, low birth weight babies, and
babies born to teen mothers incur higher maternity, neonatal (just-born, generally considered to be the first day or two after birth), and postnatal (infancy after the first few days
postdelivery) medical costs than babies born at full gestation, at healthy birth weights,
and to more mature mothers.
In terms of direct costs, newborns with no medical complications such as prematurity or
low birth weight have an average postnatal care cost of \$4,551 as of the year 2007. The
average cost of care for newborns with complications other than prematurity and low
birth weight is \$10,273. The cost rises significantly to \$49,033 for premature and low birth
weight babies. Of these costs, health insurers pay the bulk. Figure 7.1 illustrates the payment breakdown of expenses (March of Dimes, 2008).
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Section 7.1 Totaling the Cost of Care
CHAPTER 7
Figure 7.1: Cost for maternal and infant care
The cost of care for babies born premature or underweight is five times more than for other
complications and ten times more than for babies born with no complications.
SummaryDocument_final121208.pdf
As for maternal care, uncomplicated cesarean deliveries cost significantly more than
uncomplicated vaginal deliveries, at averages of \$13,329 and \$9,415, respectively. The total
average for all complicated deliveries, both vaginal and cesarean, is \$14,667. Maternal care
costs include prenatal care and care for three months postpartum (March of Dimes, 2008).
The costs for maternal and infant care should also be considered together to get a clear
view of the total cost of having a baby. The average total cost of care for both mother and
child is estimated at \$21,328. Uncomplicated pregnancies and deliveries average a mother
and infant total of \$15,047, significantly lower than the overall average. The overall average is driven up by the total for premature and low birth weight cases, which average
\$64,713 for both mother and child. Other complications are only slightly more expensive
than the overall average, at an average cost of \$22,183. Figure 7.2 illustrates the breakdown of the total average costs for mother and infant care (March of Dimes, 2008).
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CHAPTER 7
Section 7.1 Totaling the Cost of Care
Figure 7.2: Breakdown of the total average costs of maternal and infant care,
pregnancy through three months postpartum
Three months postpartum, the gap in expenses closes marginally for complicated, premature, and
uncomplicated births.
Source: March of Dimes
The indirect costs associated with birth include nonmaterial costs like time off work.
The average maternity leave from work in the United States is six weeks. Many working
mothers are not able to take more recovery time even for complicated pregnancies and
deliveries. When complications like preterm delivery and low birth weight arise, other
household members, such as grandparents and fathers, may need to take additional time
off work to help the mother. Time off work, whether paid or unpaid, means a loss in productivity to employers. Exact numbers are difficult to estimate because productivity loss
is an indirect cost, but the total productivity cost loss to U.S. employers is estimated to be
around \$260 billion per year due to all health-related work losses (Mitchell & Bates, 2011).
Abused Individuals
Nonfatal child abuse is estimated to cost the United States a total lifetime economic burden of \$124 billion, based on 2008 figures (Fang, Brown, Florence, & Mercy, 2012). The
lifetime cost estimate for each victim of nonfatal child abuse and neglect is \$210,010. The
direct costs associated with this number include the following:
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Section 7.1 Totaling the Cost of Care
CHAPTER 7
• \$7,999 for special education costs
• \$7,728 in child welfare costs for programs such as Child Protective Services
(CPS)
• \$6,747 in costs related to criminal justice
• \$10,530 in abuse-related adulthood medical costs per victim
• \$32,648 in abuse-related childhood medical costs per victim
The per-victim total also includes indirect costs associated with productivity loss of
\$144,360 (Fang et al., 2012). Additional indirect costs associated with the effects of child
abuse on the adult victim’s ability to grow social capital in the form of strong relationships
are difficult to measure.
However, measuring the indirect cost of adult domestic partner abuse is easier. In 1995,
the Centers for Disease Control and Prevention (CDC) estimated the annual indirect cost
of domestic partner abuse, including productivity loss, at nearly \$1.8 billion. The direct
costs of domestic partner abuse are related to medical treatment for injuries, mental health
treatment, and criminal justice. The annual direct cost was estimated at nearly \$4.1 billion. Accounting for inflation, the 1995 total estimated annual cost of \$5.8 billion becomes
\$8.3 billion in 2003 (Futures without Violence, 2010; National Center for Injury Prevention
and Control, 2003). This increase only reflects the loss in the value of U.S. currency, called
monetary inflation, and does not account for any changes in amount or severity of domestic partner abuse. A lack of research on the direct and indirect costs of domestic partner
abuse makes it more difficult to know which programs are most effective and to allocate
resources accordingly.
According to Brown (2011), the National Center on Elder Abuse and the Administration
on Aging report spending at least \$206.2 million in Social Services Block Grants funds and
\$42.3 million in Medicaid funds that were allocated to Adult Protective Services (APS)
programs in fiscal year 2009. These funds, set up to assist the elderly with their medical
care, were spent on protecting them from their abusers instead (Brown, 2011).
Chronically Ill and Disabled Persons
The direct and indirect costs of chronic illnesses have a significant effect on the United
States’ economy and workforce. Focusing on the seven most common chronic ailments
offers a clear view of the problem without over or under inflating the numbers. In a study
by the Milken Institute (2007), the following are the seven most common and expensive
chronic ailments in the United States and their total annual treatment expenditures in
order of cost:

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stroke: \$13.6 billion
diabetes: \$27.1 billion
hypertension: \$32.5 billion
pulmonary disease: \$45.2 billion
mental disorders: \$45.8 billion
cancer: \$48.1 billion
heart disease: \$64.7 billion
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The direct cost of treating these seven ailments for noninstitutionalized patients (those
who do not reside in prisons, long-term care facilities, specialized homes for mentally
unstable patients, and the like) is around \$277 billion annually. (The costs of treating secondary conditions related to the seven conditions listed are not included in this figure.)
Furthermore, the direct and indirect costs associated with chronic disease are expected to
skyrocket in the coming decades. Figure 7.3 illustrates the estimated costs for 2023.
Figure 7.3: Forecast of direct and indirect costs associated with chronic disease
By 2023, it is expected to cost the nation more than twice as much to treat cancer compared to other
The indirect costs associated with lost productivity for individuals with chronic conditions can be staggering. Absenteeism is the missing of days of work by employees. Workers with chronic conditions also often experience presenteeism, where they show up for
work but have severely lowered productivity over a length of time. For example, a worker
with hypertension might arrive on time every day but feel sluggish and tired and so not
accomplish his or her best possible work output. The Milken Institute study indicates
that presenteeism creates significantly more output loss than absenteeism. Output loss is
not limited to chronic disease sufferers. Caregivers like spouses and adult children caring
for elderly parents also experience output loss due to the strains of caring for somebody
with a chronic disease. Overall, output loss due to chronic disease is estimated to cost the
country over \$1 trillion annually (Milken Institute, 2007).
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CHAPTER 7
It is important to remember that although chronic diseases are among the most expensive health issues the country faces, the problem of chronic disease is potentially the area
with the most possibility of cost savings. Preventive medicine in terms of obesity control,
nutrition, immunizations, and smoking cessation creates an opportunity for a healthier
populace with fewer chronic conditions. It is estimated that improving lifestyle habits
now could save the country \$1.1 trillion annually by 2023 (Milken Institute, 2007). Public
programs, like First Lady Michelle Obama’s “Let’s Move” campaign, work toward this
savings goal by educating and encouraging the public at large to improve our health by
improving our lifestyles.
Persons Diagnosed With HIV/AIDS
The Centers for Disease Control and Prevention (CDC) estimate that new cases of HIV
cost the United States and its territories a total of nearly \$16.5 billion per year and that
the cost for a lifetime of HIV
treatment is \$379,668 per person (Centers for Disease Control
and Prevention, 2012d). Preventing new cases of HIV is an
important part of the nation’s
health objectives, and the CDC
prevention. Reducing the number of people with HIV/AIDS
not only creates a healthier citizenry but it also saves the nation
a lot of money. To that end, the
CDC earmarked \$359 million
annually for the years 2012–2016
to help fund HIV care and preCourtesy of jcarillet/iStockphoto
vention programs in state-run
health departments throughout When citizens are healthy, the nation saves a lot of money
the nation. That number is sig- that would have otherwise been used to fund the treatment of
nificantly increased from the acute and chronic illnesses, such as HIV/AIDS.
\$111 million total that the CDC
used from 2007 to 2010 to fund
HIV testing, which was estimated to have created a savings of \$1.2 billion in medical costs
during that same time (CDC, 2011b). The CDC estimates that every HIV infection that is
prevented saves the country \$355,000 in lifetime medical costs per patient (CDC, 2010b).
Persons Diagnosed With Mental Conditions
Mental conditions impose a heavy financial burden on patients and the country in terms
of both direct and indirect costs. Mental health care costs are estimated to be as much as
6% of the nation’s total annual health care costs—an expenditure of about \$57.5 billion
per year. Spending on mental health in America is tied with spending on cancer (National
Institute of Mental Health [NIMH], 2011). The CDC estimates that the direct cost of treating mental illness is closer to \$100 billion annually (Reeves et al., 2011).
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Section 7.1 Totaling the Cost of Care
CHAPTER 7
The indirect costs associated with mental illness are much higher than the direct costs.
In addition to the \$100 billion annual cost of care estimated by the CDC, mental illness is
estimated to cost the country \$193 billion in lost wages and earnings due to absenteeism
and presenteeism. Add another \$24 billion annually in disability benefits, and the indirect
costs are close to two and half times the annual direct cost (Reeves et al., 2011).
Suicide- and Homicide-Liable Persons
The indirect costs of suicide are estimated to be much higher than the direct costs associated with suicide. This is partially because most of the direct cost of suicide is actually a
direct cost of mental illness, like severe depression, and so is measured as mental illness,
not as suicide. The most recent estimates on the annual cost to the country of suicide puts
the direct cost around \$1 billion and the indirect costs of lost productivity and wages,
as well as indirect costs to the remaining family, close to \$32 billion (Crosby, Ortega, &
Stevens, 2011).
Homicides are quite a bit costlier. A study conducted at Iowa State University found that
the total for both direct and indirect costs of a single murder is \$17.25 million. The study
estimates that every murderer costs the country \$24 million (DeLisi et al., 2010). The direct
costs included in these figures include costs associated with the criminal justice system,
whereas the indirect costs include lost productivity of the criminal, the victim, and the
victim’s friends and relatives.
Persons Affected by Alcohol and Substance Abuse
The costs associated with alcohol and substance abuse are both health and socially oriented. The overconsumption of alcohol alone is estimated to cost the country over \$223.5
billion per year, a rate of nearly \$1.90 for every alcoholic drink consumed. The majority of the estimated cost, 72.2%,
is from indirect costs associated
with lost productivity. Only 11%
of the annual cost goes to health
care, and criminal justice costs
are a close third, at 9.4% of the
total. The government picks up
around 42.1% of the tab at \$94.2
billion annually ( …
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