Healthcare Economics for Executives and Managers

Five basic processes or steps involved with budgeting are (Danna, 2018):

1. Development
2. Monitoring
3. Reporting
4. Justifying
5. Variance Analysis

Before developing an effective budget, information should be supplied to those creating the budget in advance of the annual budget-planning cycle. This information should provide a retrospective history of the financial activities and status of the unit and organization as a whole. This information should show the past revenue sources, anticipated sources, and any potential uncertainties related to revenue streams. This allows for discussions to deal with future challenges related to the budget.

When developing the budget, a timeline is needed to create a preliminary, revised, and then a final budget which is consistent with the organization's practices and goals. Review and approval processes of the organization need to be followed. The goal is to make sure that once the final budget is confirmed and released that there should be no hidden surprises unaccounted for. These surprises are not appreciated!

Those nurse managers and executives in charge of budgets are expected to routinely monitor budget reports which are usually generated monthly. This allows the manager to justify deviations and to make the necessary adjustments accordingly. This may entail dividing the allocations monthly which could be based on historical trends. Because of this, managers need to be knowledgeable of the trending methodology and current trends within their organization. Over-or-under correction of variance can result due to a lack of knowledge of the current trends and more unexpected difficulties in the future.

Budgetary reports are sent to managers and nurse executives on a monthly, quarterly, and annual basis. This helps them to better and more appropriately manage their units and or services. The overall financial status of the organization is also received at least bi-annually, but this is determined by the financial department of the organization and authorized center director.

Once reports are received they must be checked and analyzed for accuracy and any hidden content to justify an increase in expenditures.

As noted in the Case Study, Sharon, the Nurse Manager of the Hospice unit, had a justified reason for the added staffing expenses on her unit. Naturally, this justification was consistent with the overall objectives and fiscal plan of the organization. She had the documentation to justify the added expenditures.

Many organizations have a justification plan in place which often requires a business case to justify the expenditure. Some expenditures may put the organization into a negative variance but are justifiable because of the long-term return on investment which will ultimately yield a financial benefit to the organization.

Because budgets are fluid, line items are rarely on target. Therefore, variance analysis is an essential part of the budgeting process. Variance analysis is a tool applied to financial and operational data that aims to identify and determine the cause of the variance. In project management, variance analysis helps maintain control over a project’s expenses by monitoring planned versus actual costs.

Effective variance analysis can help a company spot trends, issues, opportunities and threats to short-term or long-term success. Variances between planned and actual costs might lead to adjusting business goals, objectives or strategies (Cross, 2018).

Variances may be characterized as volume, efficiency, rate, or non-salary expenditure (Cross, 2018):

• Volume variances in the hospital are usually in response to a fluctuation in patient days.
• Efficiency variances in the hospital are usually expressed in changes from the anticipated hours per patient day (HPPD).
• Rate Variances reflect the differences between the budgeted hourly rate and the paid hourly rate.
• Non-salary expenditure variances may be caused by changes in patient mix and volume, supply quantities and costs, price paid, or new technology or regulations.

“Revenue” is the total amount of income anticipated during a defined period.

Three Revenue Streams for Healthcare Organizations include but are not limited to are the following:

• Reimbursement for patient care
• Sales of goods and products
• Membership dues in the case of direct-member health maintenance organizations (HMOs)

Revenue generation is seldom under the direct control of managers. However, a certain percentage of anticipated or actual revenue is allocated to specific cost centers which are under the manager’s direction. The extent to which the manager can control fixed expenses is often limited.

The Nurse Executive and Nurse Managers are responsible for operating within the revenue allocation by controlling expenses and/or creating services that will generate revenue. The greatest influence that those responsible for working within the budgetary constraints is on fiscal stability by controlling variable expenses, including payroll costs.

“Expense” budget is comprised of salary and non-salary items. Managers are responsible for managing expenditures within an assigned cost center (outflow of resources/cash). Some managers may be responsible for a profit center with an inflow of cash.

In business, the term operating expense (OPEX) appears in budgeting and spending, but also as an income statement term in financial accounting (Danna, 2018). In brief, "Operating Expenses" include most expenditures for operating the firm's usual line of business—expenditures that are not capital spending. Operating expenses do not result in capital assets. Instead, they serve entirely for—not surprisingly—"operating" the business. In most organizations, employee wage and salary expenses account for a large percentage of the operating budget (Danna, 2018).

Costs are either fixed or variable (Danna, 2018):

• Fixed costs remain constant for the organization regardless of fluctuations in activity levels, such as insurance premiums, contract fees, or rental fees.
• Variable costs fluctuate in response to external or internal changes such as changes in the census, staff mix, patient acuity, or product costs.

“Capital” budget includes equipment and renovation expenses needed to meet long-term goals. Capital budgeting is the process in which a business determines and evaluates potential expenses or investments that are very large (Danna, 2018).

This process includes the specific criteria organizations have when purchasing certain equipment. These items must have an expected lifespan (performance) of one year or more and exceed a certain dollar value. Additional costs also need to be determined, such as installation, delivery charges, and service contracts (Rudio, 2018).

Today, managers are expected to understand the capital budgeting process to work effectively within their organization. Part of the capital budgeting process is understanding amortization which includes an assignment of costs to the capital item for its lifetime. Knowing the “Life Expectancy” of equipment, programs, or services is vital so that a replacement strategy can be set in motion if need be. This can be built into the capital budgeting process.

Environmental needs of many healthcare organizations require on a larger scale, constant capital planning. This includes providing for space and buildings needed to conduct business while making sure that regulatory requirements are implemented as required. The rate of technology innovation has put a greater demand on construction schedules. The challenge is that the regulatory requirements that surround building plans need relatively long lead time. Because of this, by the time the building is constructed to house designated clinical services it has become outdated!

“Operating” budget or annual budget is a plan to monitor anticipated day-to-day activities, resources, personnel, and supplies, typically over a one-year period which may or may not be in concert with the calendar year. To allow for easy calculation of “bottom-line” profit or loss revenue and expense segments are separated. Throughout the year the operating budget is revisited to determine if the organization is on target to meet its projected financial goals. Management practices have a significant impact on the success of the operation budget.

James, CEO of Care Unlimited, was working with the financial consultant to develop a new strategic plan to present to the Board of Directors. The current strategic plan predicted 3%-4% growth over each of the next 10 years and based its resource acquisition on this assumption. They determined that there would be grave consequences if its financial position of growth fell below 2.6% per year on average.

The Scenario development process assisted the CEO and financial consultant in examining the possible consequences of excessive growth or excessive loss. Now in their new strategic plan, they compensated for the potential outcomes that could occur and put additional funds into an emergency trust fund for the time being.

Jennifer, an ICU RN, lives in California and usually has at the most two patients depending on their acuity for at times she can only manage one patient safely, especially if her patient has had recent open-heart surgery, is critical and unstable.

She was assigned two patients because there were several people who called in because they were ill. Working with the Charge Nurse, they assigned her to a second patient who was stable and was to be transferred to a step-down unit the next day. An ICU Nurse Tech was assigned to help her out with her critical patient. The Charge Nurse was aware of the state required staffing ratios (Greene, 2018).

Fortunately, Jennifer was in California, and the California Governor Gray Davis signed into law a bill mandating minimum nurse-to-patient staffing ratios (Greene, 2018). The challenge was during a Nursing Shortage the ratio depended on the availability of RNs. Support personnel working in specialized areas often were trained above and beyond the average nursing technician.

Managed care, in terms of healthcare, means a person agrees only to visit certain doctors and specialists contracted with their health care plan. In turn for this agreement, the costs are kept low by a managing company who oversees all health care interactions of their clients. The reason these costs are kept significantly lower is that the company has contracts with specific healthcare providers and hospitals. Thus, patient utilization and provider practices are overseen by an entity that has a fiduciary interest in the interactions between the two (Cross, 2018).

There are three different types of managed care plans that are available:

1. Health Maintenance Organizations (HMO)
2. Preferred Provider Organizations (PPO)
3. Point of Service plans (POS)

Each is a little different from the other but, provides the same basic service (Cross, 2018).

Initially, advocates of managed care expected that it would do the following:

• Optimize the use of resources, avoiding over or under use.
• Ensure better outcomes of care.
• Increase accountability at all levels.
• Reduce variations in practice.
• Contain or reduce expenditures.
• Shift focus from acute care and crisis intervention to disease prevention and health maintenance.

Advantages of Managed Care:

1. Lower cost
2. Accredited Care
3. Cheaper Prescriptions

Disadvantages of Managed Care:

1. Restricted Care
2. Strict Approval
3. Referral Problems

While many people criticize the quality of care and the ethical practices of managed care providers, they still provide a great service to a large population who would go without healthcare until they became extremely sick, had no other recourse and became deathly ill. Without health insurance, even the most minor illnesses can cause an incredible amount of financial stress (Cross, 2018).

Costs can be contained through a reduction in force strategies (RIF) and cutting back or elimination of services not critical to the organization’s goals. This may include that of maintaining fiscal viability. A frequent practice is outsourcing specific services such as food services, housekeeping, and linen services. Some organizations contract out their payroll, transcription, and other business services. As with both practices, there may be hidden costs which out-strip the anticipated cost savings.

Before the initiation of a RIF to contain costs, the following needs to be considered:

1. Are there potential ethical issues which will affect safe patient care?
2. Will there be more preventable accidents and then the intrusion of regulatory agencies and sanctions?
3. Do present contracts for members of the organization and their organized labor have a stipulation that there will be “no-layoffs”?

Thus ethical, legal and contractual issues need to be considered when RIFs are considered a means of reducing costs (Danna, 2018).

The practice of cost shifting was initially used to allow hospitals to recover some uncompensated billings by transferring these costs to Medicare and other payers. Prospective Payment Systems (PPS) was instituted to deter cost shifting, and this resulted in the closure of many hospitals or consolidation with other healthcare organizations.

The advent of DRG classifications and linking them with nursing acuity classifications resulted in cost savings which are attributed to two factors:

1. Decreased lengths of stay
2. Avoidance of admissions when care can be provided safely in another setting

Consequently, a sub-industry was created. In response to the implementation and compliance with DRGs, we have the following:

1. Coders
2. Case management
3. Nurses who specialize in discharge planning and patient placement
4. Publishing companies that produce DRG manuals
5. Government departments whose job is to ensure compliance with PPS Regulations

Administrators, Unit Managers, Economists, Efficiency Experts and Front-Line Staff believe that resources can be better managed through the development and application of better business information, and successful care systems.

To control the cost of supplies and equipment a process called, “competitive bidding” is used. This allows organizations to obtain discounts on quality products from various vendors and distributors. Most hospital employees and patients have no idea of the cost of supplies and equipment and the cost of processing.

Controlling the cost of supplies and equipment is a never-ending battle, and the development of “inventory control systems” help to match supply and demand and decrease utilization and loss due to theft. When staff is informed of “pricing /cost of frequently used items on their unit they may “comparison shop” for the most cost-effective products and supplies to be used in their own department.

Some departments end up sharing some high-priced equipment and have set up processes to do so. Monthly, managers receive reports detailing material costs for their units or departments.

On July 30, 1965, President Lyndon B. Johnson signed into law the bill that led to the development of Medicare and Medicaid. The original Medicare program included Part A (Hospital Insurance) and Part B (Medical Insurance). Today these 2 parts are called “Original Medicare.” This was created through Title XVIII of the Social Security Act. These programs were implemented in 1966 (History, 2018).

Over the years, changes were made to Medicare such as (Top Health Issues, 2018):

• More people have become eligible. In 1972, Medicare was expanded to cover disabled, people with end-stage renal disease (ESRD) requiring dialysis or kidney transplant, and people 65 or older that select Medicare coverage.
• More benefits, like prescription drug coverage, have been offered.
• In 1973 Medicare was expanded to include people of any age who meet Medicare’s definition of disability. Today, more than 90% of Medicare beneficiaries are ages 65 or older.

The Medicare Prescription Drug Improvement and Modernization Act of 2003 (MMA) made the biggest changes to the Medicare program in 38 years. Under the MMA, private health plans approved by Medicare became known as Medicare Advantage Plans. These plans are sometimes called "Part C" or "MA Plans.” The MMA also expanded Medicare to include an optional prescription drug benefit, “Part D,” which went into effect in 2006 (Medicare Part D, 2019).

The Diagnosis-Related Groups (DRG) reimbursement methodology replaced the previous payment method for all private hospitals with admissions on or after July 1, 2013, and for non-designated public hospitals with admissions on or after January 1, 2014 (Finkler et al., 2007).

A per diem payment method is used for payment of rehabilitation services and administrative day services rendered by DRG hospitals (Finkler et al., 2007).

In 1982, Congress mandated the creation of a prospective payment system (PPS) to control costs. Congress looked at the success of State rate regulation systems in controlling costs and mandated the implementation of a prospective payment system model that had been successful in several States. This system is a per-case reimbursement mechanism under which inpatient admission cases are divided into relatively homogeneous categories called DRGs. In this DRG prospective payment system, Medicare pays hospitals a flat rate per case for inpatient hospital care so that efficient hospitals are rewarded for their efficiency and inefficient hospitals have an incentive to become more efficient (Finkler et al., 2007).

The DRGs classify all human diseases according to the affected organ system, surgical procedures performed on patients, morbidity, and sex of the patient (Beattie, 2018). The classification also accounts for up to eight diagnoses in addition to the primary diagnosis, and up to six procedures performed during the patient’s stay. This reimbursement system was initially used in 1983 to deter rising costs within the Medicare system (Finkler et al., 2007).

Initially, DRGs and PPS were applied to care provided to care for Medicare patients in Acute Care Hospitals and was based on the projected case mix for the institution, adjusted for age. Medicaid and other payers along with private insurance companies adopted Medicare’s approach (Finkler et al., 2007).

Payment by Diagnosis Related Group (DRG) encourages access to care, improves transparency, rewards efficiency, and improves fairness by paying similarly across the board to hospitals providing similar care. Therefore, payment by DRG simplifies the payment process, encourages administrative efficiency, and basis payments on patient acuity which reflects the intensity of need (Finkler et al., 2007).

The DRG reimbursement rate is fixed and is calculated based on the law of averages. In the upcoming case study, Mitch’s diagnosis placed him into a specific reimbursement category. The cost of his services may have exceeded the reimbursement rate; for others, the cost of care will be less than the reimbursement rate. Thus, the law of averages applies (Finkler et al., 2007).

Medicare’s PPS is the mechanism used for transferring funds to hospitals based on the facility’s DRG profile. PPS provides a pre-determined amount of funds to the organization, based on the anticipated utilization by a defined group of patients (HMOs, 2018).

Initially, DRGs and PPS were used by the Federal Government to constrain Medicare costs. However, these processes were adopted first by Medicaid and then by private sector insurers. PPS effectively signaled the end of the “usual and customary” reimbursement system based on charges for care or service rather than on the cost of those services (HMOs, 2018).

At first, Medicaid gave medical insurance to people getting money assistance. Today, a much larger group is covered:

• Low-income families
• Pregnant women
• People of all ages with disabilities
• People who need long-term care

States can tailor their Medicaid programs to serve the people in their state best, so there’s a wide variation in the services offered (History, 2018). Medicaid is funded jointly by the federal and state governments. The state’s per capita income determines the amount of federal matching funds.

Capitation is a payment arrangement for health care service providers such as physicians or nurse practitioners. It pays a physician or group of physicians a set amount for each enrolled person assigned to them, per a specific agreed upon period, whether that person seeks care or not. As a payment model, capitation offers opportunities for primary care physicians to influence the future of health care by improving the management of resources at a local level (Greene, 2018).

Organizations financed under capitation are expected to manage their business in such a way that they provide all needed and agreed-on care to patients covered under this plan. The capitation business model calls for risk to be spread within the group for the array of services that are agreed ahead if time. Generally, the care provided is “conservative” that is, the services provided are primarily intended to prevent illness, to maintain health, and to care for episodic acute care needs based on known or proven therapies (Greene, 2018).

When an organization provides care beyond the agreed upon plan, such organizations open themselves up for considerable risk. The regulations that govern managed care require that only the services agreed upon are given to patients and if an organization goes beyond the agreed upon services it can become in financial and regulatory jeopardy. The public finds this concept difficult to understand and often places the healthcare organization in a negative light (HMOs, 2018).

Health Maintenance Organization (HMOs), Preferred Provider Organizations (PPOs), and Medical Service Organizations (MSOs) are financed through Capitation (Greene, 2018).

During the budgeting process, various income streams need to be evaluated which includes capitated contracts. Healthcare organizations decide if a certain population group should be given discounted rates for services and that if it would be reasonable and profitable to do so. The organization needs to evaluate the potential financial risk before a decision is made.

The Health Maintenance Organization Act of 1973 required employers with 25 or more employees to offer federally certified HMO options if the employer offers traditional healthcare options (HMO, 2018).

An HMO covers care rendered by those doctors and other professionals who have agreed by contract to treat patients in accordance with the HMO's guidelines and restrictions in exchange for a steady stream of customers. HMOs cover emergency care regardless of the health care provider's contracted status.

The HMO is a type of medical insurance group that provides health services for a fixed annual fee. It is an organization that provides or arranges managed care for health insurance, self-funded health care benefit plans, individuals, and other entities, acting as a liaison with health care providers on a prepaid basis (HMO, 2018).

HMOs often require members to select a primary care physician (PCP), a doctor who acts as a "gatekeeper" to direct access to medical services but this is not always the case. PCPs are usually internists, pediatricians, family doctors, geriatricians, or general practitioners (GPs). Except in medical emergency situations, patients need a referral from the PCP to see a specialist or other doctor, and the gatekeeper cannot authorize that referral unless the HMO guidelines deem it necessary.

Some HMOs pay gatekeeper PCPs set fees for each defined medical procedure they provide to insured patients (fee-for-service) and then capitate specialists. This means that the HMO pays a set fee for each insured person's care, irrespective of which medical procedures the specialists perform to achieve that care. While others use the reverse arrangement. HMOs tend to have lower monthly premiums and lower costs-sharing (HMOs, 2018).

Prepaid group practice is considered the precursor to HMOs. The prepaid group practice type of health care plan was pioneered by the Ross-Loos Medical Group in California, U.S., in the 1920's and the Kaiser Permanente, in the 1930's and are the models for pre-paid group practice (Pew Research, 2017).

In this model, physicians are organized into a group practice, and there is one insuring agency. Insurers, employers, or others contract with the physician group to provide a predetermined range of benefits to a specific population for a fixed and agreed upon price. Providers in this group are at risk in that they were required to provide the full range of agreed-on services, regardless of whether the cost of benefits exceeded the established pre-arranged rate of payment (Pew Research, 2017).

In Medicaid terminology, a Pre-Paid Health Plan (PHP) is not the same as an HMO even though the terms are often used interchangeably in commercial managed care business. PHPs can contract on a capitated basis for a non-comprehensive set of services, which is often called partial capitation, or on a cost basis. Federally qualified health centers can also be designated as PHPs if they meet certain conditions (Pew Research, 2017).

Today there are several HMO Models which still exist. Some insurers are exiting HMO market and some excellent programs are becoming insolvent due to financial crisis (Reimvursement, 2018).

Independent or individual practice association (IPA) is an Open-panel system in which individual physicians or the practice association contract to provide care to enrolled members. In this system physicians retain their right to treat fee-for-service patients, however many IPAs have had to cease existence due to financial problems (Reimvursement, 2018).

Staff Model is when most of the physicians are on the staff of and derive their salary from the HMO. These physicians are the sole source of care for enrollees (Reimvursement, 2018).

Group Model is when a single, large multispecialty group is the sole or major source of care for enrollees and the contract is exclusive with one HMO. This is very similar to the staff model and often is labeled staff/group model (Reimvursement, 2018).

Network Model consists of two or more group practices which contract to care for most of those patients enrolled in the HMO plan. Usually, the physicians can care for fee-for-service patients as well as those patients from the HMO (Reimvursement, 2018).

Care from non-HMO providers generally is not covered except for emergencies occurring outside the HMO’s treatment area. HMO members are required to obtain all treatment from HMO physicians. The HMO will not pay for non-emergency care provided by a non-HMO physician. Additionally, there may be a strict definition of what constitutes an emergency. Those who choose to use non-HMO providers must pay out of pocket for those services since their own HMO often has the same services. When a consult is requested the Primary Physician must contact the consultant if it does not go against the HMO policies (Reimvursement, 2018).

Market Share for HMOs tends to be geographical and usually is in the metropolitan regions where there is a larger clientele which will utilize the HMO’s services. Initially, it was thought that HMOs would prevail over time except now many respected programs have collapsed due to the growing pessimism within the medical community and constant reimbursement conflicts under various managed care contracts (Reimvursement, 2018).

The definition Medicare gives a Social Health Maintenance Organization (SHMO) is a health care insurance plan offering a complete range of coverage and benefits, including personal care services, hearing aids, dental care, eyeglasses, prescription drug, chronic care benefits, short-term nursing home care, and medical transportation services. An SHMO is more expensive, but enrollees are covered for far more services than Original Medicare (Schmidt, 2018).

The program for All-Inclusive Care for the Elderly falls under the auspices of the Health Care Financing Administration. Now Centers for Medicare and Medicaid Services (CMS) conducted demonstration projects to determine the feasibility of increasing Medicare long-term care benefits. Early findings showed that SHMOs were able to reduce hospitalization rates compared with the rates of non-SHMO Medicare population but, that the total costs were not necessarily reduced. All the experimental sites experienced substantial losses during the first three years of operation. By year 5, two projects broke even or had a modest gain and the other 2 suffered substantial losses.

The SHMO demonstration tests which were initiated in 1985 evaluated a model of Service Delivery which intended to integrate acute, chronic, and Long-Term Care. The Secretary of Health and Human Services submitted the final two evaluations to Congress within set timelines. The end results found that the demonstration reflected the following:

• The demonstration did not consistently reduce hospital use or long-term nursing facility use
• Did not consistently deliver superior quality care
• Favorable effects on service use and use of preventative care were attributed to general characteristics of tightly organized managed care rather than to the features of the model being tested in the demonstration

A concern dealt with equity for plans and beneficiaries which concluded that all beneficiaries should be able to receive the same benefits package regardless of where they live and that certain plans should not be advantaged relative to other plans and requires that Medicare treat no one plan above another plan and all plans should be treated equally. The only difference would be if a payment differential was warranted based on the performance of an organization.

SHMOs are paid more than regular Medicare Plus Choice plans and are thus mandated to provide certain additional services. However, because both programs enroll similar types of members converting SHMOs to Medicare Plus Choice plans and paying them as Medicare Plus Choice plans is feasible. After the SHMOs demonstration, this process was encouraged.

Medicare does make risk-adjusted payments to Medicare Plus Choice plans to improve the accuracy of payments to plans that enroll a cross section of beneficiaries. However, some beneficiaries need certain payment adjustments based on the type of enrollee, such as those who are members of the frail population needing healthcare.

The Medicare Advantage Plan will probably have a payment increase in 2019 since the U.S. government proposed a 1.84% payment increase for those enrolled in Medicare Advantage for the fiscal year 2019. January data indicated that Medicare Advantage 2018 enrollment was 20.9 million elderly and disabled individuals and accounted for 35% of all Medicare enrollment (Medicare Part D, 2019).

Preferred Provider Organizations (PPO) developed due to the discontent people had with other models of managed care. Essentially, this integrated system served as a broker between the purchaser of healthcare and the provider. The PPO system enables its clients the option to use or not use the preferred providers on the healthcare plan. In-plan providers are considered most beneficial because of lower costs and greater benefits (HMOs, 2018).

Providers are paid a discounted fee for service and do not participate in financial risk sharing with this system. The downfall is that even though the client has a greater choice than many of the HMOs its ability to control costs is limited by the level of discount that can be negotiated with providers (HMOs, 2018).

The third-party payer is an agent composed of the financial institution that pays the insurance claims. The first party is the patient; second party is the provider. Traditionally third-party payers do not provide direct care, and therefore they pay providers or provider groups to care for defined groups or individuals. Payment is for care, products, and services rendered.

The largest third-party payer is the U.S. government. It pays for Medicare and Medicaid at rates varying from state to state. These rates are based on contributions each state makes. Many Medicare and Medicaid are now negotiated as managed care contracts (Top Health Issues, 2018).

An Indemnity health insurance plan is a healthcare plan that allows you to choose the doctor, healthcare professional, hospital or service provider of “your choice” and gives you the greatest amount of flexibility and freedom in a health insurance plan. The insurance company pays most of the care the patient receives in an acute care facility and pays varying amounts for outpatient services based on the patient’s chosen healthcare plan (Araujo, 2017).

The Children’s Health Insurance Program (CHIP) was created in 1997 to give health insurance and preventive care to nearly 11 million, or 1 in 7, uninsured American children. Many of these children came from uninsured working families that earned too much to be eligible for Medicaid. All 50 states, the District of Columbia, and the territories have CHIP plans (Araujo, 2017).

“The 2010 Affordable Care Act (ACA) brought the Health Insurance Marketplace to a single place where consumers can apply for and enroll in private health insurance plans. It also made new ways to design and test how to pay for and deliver health care. Medicare and Medicaid have also been better coordinated to make sure people who have Medicare and Medicaid can get quality services (Araujo, 2017).

Medicare and Medicaid have existed for 50 years and have built a smarter and healthier system. These programs will continue as the standard bearers for coverage, quality and innovation in the American health care system. Though Medicare and Medicaid started as basic insurance programs for Americans who did not have health insurance, they’ve changed over the years to provide more and more Americans with access to the quality and affordable health care they need (History, 2018).

The traditional method of obtaining health insurance was through an Indemnity Insurance program. This healthcare plan allows an individual to choose the doctor, healthcare professional, hospital or service provider of their choice and gives them the greatest amount of flexibility and freedom in a health insurance plan. Indemnity insurance generally covers a predetermined percentage of acute care services regardless of the absolute charge for those services (Araujo, 2017).

Advertising is expensive and creating “brand recognition” is vital along with “brand loyalty.” Due to the costs of advertising, many organizations take advantage of “free” publicity and providing the public with interest stories which shed a positive image of their services. Many hospitals and healthcare systems have an ongoing presence on the internet (Greene, 2018).

Most hospitals using the internet for marketing subscribe to the eHealth Code of Ethics. The goal of the eHealth Code of Ethics is to ensure that people worldwide can confidently and with a full understanding of known risks realize the potential of the Internet in managing their own health and the health of those in their care (Medicare Part D, 2019).

Today the U.S. healthcare industry's ongoing transformation creates both challenges and opportunities for marketers. This transition is driven by two variables:

1. One is the evolution from a fee-for-service payment system to a healthcare delivery model based on transparency, quality outcomes and patient satisfaction.
2. The second is the rise of the empowered healthcare consumer. These changes affect both the "how" and the "who" of medical marketing strategies. As a result, the role of physicians as decision-makers is undergoing a transformation (Greene, 2018).

Healthcare marketers continue to adapt to the new reality brought about by the shift to payments based on outcomes, increasing transparency, and an empowered healthcare consumer. We see growth in marketing budgets over the lows of 2013. The largest increases are going to digital marketing tactics (Healthcare Marketing Trends, 2017). They realize the need to recognize patients as value-conscious shoppers and have had to reshape ad strategies. Emphasis is on educating patients and engaging them in their growing role as healthcare consumers (Greene, 2018).

Patients are on the hook for an increasing portion of their healthcare costs given the steady increase in health plan deductibles, copays and co-insurance. That has given them a stronger financial incentive to shop around for their providers. Providers want to convince these consumers that they are the highest-quality and most affordable option (Healthcare Marketing Trends, 2017).

Many organizations have developed their own surveys usually aimed at brand recognition or identification. Professional and well-structured focus groups provide organizations with useful information allowing the organization to better target subsequent survey activities.

Organizations have an image that they want to project that must be believable, honest, appealing, and sustainable. Those individuals that already part of the organization or who utilize its services should be loyal to the organization. The goal is to increase the target markets. At the executive level, there needs to be a “buy-in” by all which ensures that everyone is “on board” and improves the public persona (Greene, 2018).

Public Relations is an ongoing function of many organizations. People who are public relation professionals must interface with the public, press, community constituents, law enforcement, regulatory bodies, employees, patients and families. This requires them to know when to be enthusiastic, positive, respectful and caring (Sullivan, 2018).

Another function is to do “damage control” and absorb, deflect negative comments while maintaining professional and personal dignity, and being respectful to others, even those who are detractors (Rudio, 2018).

Due to the changes in regulation which is a result of the Affordable Care Act of 2010, hospitals have been buying up physician practices at an accelerated rate. Integrated systems are better able to coordinate care among physicians, hospitals and other parts of the healthcare delivery system. Doctors are becoming employees (Healthcare Marketing Trends, 2017).

According to a Jackson Healthcare survey of physicians (Healthcare Marketing Trends, 2017):

• 21% of physicians in all specialties are employed by a hospital
• 14% are employed in a single or multi-specialty owned by a hospital
• 14% are employed by a privately owned single or multi-specialty clinic
• 9% are employed as independent contractors or Locums

Now that physicians have become employees they lose their ability to make final decisions which means when it comes to buying and selling medical product and services they must rely on the organization they belong to. Now they work with others involved in the purchasing process. However, they still play a key role as advocates and others make the final purchasing decisions.

The internet has greatly influenced today’s healthcare consumer. No longer is the healthcare consumer content to accept what a doctor tells them blindly. They do their homework before visiting a doctor. Many people research their conditions and treatment options after visiting a doctor as well. They see healthcare as a collaboration between themselves and their doctors. They take responsibility for their health and the decisions that affect it. The doctor no longer has the only say on treatment, hospitals, medications, etc.

According to Pew Research:

• One in three American adults has gone online to figure out a medical condition.
• 72% of internet users say they looked online for health information within the past year.
• 47% of internet users search for information about doctors or other health professionals.
• 38% of internet users search for information about hospitals and other medical facilities.

The most common research topics are specific diseases or conditions; treatments or procedures; and doctors or other health professionals.

To summarize according to Pew Research consumer marketing tactics, the greatest growth is taking place in mobile/tablet apps, social media and digital ads. Hospital providers are also shifting to digital channels to market to healthcare consumers.

Constant changes to the U.S. Healthcare delivery environment affect healthcare marketers. The major players/groups include healthcare consumers, providers, and payers. These groups constitute the primary “who,” depending on the product or service (Healthcare Marketing Trends, 2017).

The MM&M /Ogilvy CommonHealth Healthcare Marketers Trend Report 2016 covers pharmaceutical, biotech, medical devices, and diagnostic companies. Physicians continue to be the most important group for these companies with 93% of respondents stating that they belonged to their leading three target groups. They were followed by payers and patients (consumers) with each about 56% of respondents. It’s not surprising that doctors continue to be the primary marketing target. After all, they still buy, prescribe, recommend and advocate products and services.

What is significant is that payers and consumers were picked by the same number of respondents as a target group, ahead of other providers, shareholders and advocacy groups. This may reflect the new reality of decision making in healthcare. Doctor decision making is gradually shrinking as decision making shifts to payers and healthcare consumers. The trend is for healthcare marketers to increasingly target consumers and payers but keeping doctors as the underpinning for their overall marketing strategy.

Digital channels are overtaking traditional marketing channels. This is true for all marketing sectors, including provider-to-consumer marketing. The MM&M study cited above shows that the greatest growth for the pharmaceutical, diagnostics, biotech and medical device marketing budgets is taking place in social media, mobile/tablet apps and digital sales materials (Healthcare Marketing Trends, 2017). For consumer marketing tactics, the greatest growth is taking place in mobile/tablet apps, social media and digital ads. Hospital providers are also shifting to digital channels to market to healthcare consumers.

According to Think with Google’s The Digital Journey to Wellness: Hospital Selection:

• 77% of patients use search engines prior to booking appointments.
• Search drives nearly three times as many visitors to hospital sites, compared to visitors from other referral sites.
• 44% of patients who research hospitals on a mobile device schedule an appointment.
• Before the moment of conversion, patients typically search on symptoms and condition terms.

Prior to booking an appointment:

• 77% of patients used search
• 83% used hospital sites
• 54% used health insurance company sites
• 50% used health information sites
• 26% used consumer-generated reviews