INDUSTRIAL ENGINEERING APPLICATIONS IN HEALTH CARE SYSTEMS:INTRODUCTION TO HEALTH CARE DELIVERY SYSTEMS

INTRODUCTION TO HEALTH CARE DELIVERY SYSTEMS

This section gives a brief history of health care delivery in the United States for readers who may be unfamiliar with the health care industry. It also addresses government regulations and health care financing issues that impact the delivery of health care.

History of Health Care Delivery Systems

Historically, most health care has been delivered in hospitals. Initially, hospitals were founded, many of them by charitable organizations, to house poor people during epidemics. As medical technology advanced, hospitals actually became centers for treating patients. They also became resources for community physicians, enabling them to share high-cost equipment and facilities that they could not afford by themselves.

Some hospitals are government-owned, including federal, state, county, and city hospitals. Federal hospitals include Army, Navy, Air Force, and Veterans Administration hospitals. Nongovernment hospitals are either not-for-profit or for-profit. The not-for-profit hospitals are owned by church-related groups or communities and constitute the bulk of the hospitals in the country. Investor-owned for- profit hospitals are mostly owned by chains such as Hospital Corporation of America (HCA) and Humana.

Government Regulations

A number of federal, state, county, and city agencies regulate hospitals. These regulations cover various elements of a hospital, including physical facilities, medical staff, personnel, medical records, and safety of patients. The Hill-Burton law of 1948 provided matching funds to towns without community hospitals. This resulted in the development of a large number of small hospitals in the 1950s and 1960s. The enactment of Medicare legislation for the elderly and the Medicaid program for the poor in 1965 resulted in rapid growth in hospitals. Because hospitals were paid on the basis of costs, much of the cost of adding beds and new expensive equipment could be recovered. Many states developed ‘‘certificate-of-need’’ programs that required hospitals planning to expand or build a new facility to obtain approval from a state agency (Mahon 1978). To control expansion and associated costs, the National Health Planning and Resources Development Act was enacted in 1974 to require hospitals that participated in Medicare or Medicaid to obtain planning approval for capital expenditures over $100,000. The result was a huge bureaucracy at local, state, and national levels to implement the law. Most of the states have revised or drastically reduced the scope of the law. Many states have changed the review limit to $1 million. In other states, only the construction of new hospitals or new beds is reviewed (Steinwelds and Sloan 1981).

Health Care Financing

Based on the method of payment for services, patients can be classified into three categories. The first category includes patients that pay from their own pocket for services. The second category includes patients covered by private insurance companies. The payment for services for patients in the last category is made by one of the government programs such as Medicare. A typical hospital receives approximately 35% of its revenue from Medicare patients, with some inner-city hospitals receiving as much as 50%. A federal agency called the Health Care Financing Administration (HCFA) manages this program. Medicare formerly paid hospitals on the basis of cost for the services rendered to Medicare patients. Under this system of payment, hospitals had no incentive to control costs and deliver the care efficiently. To control the rising costs, a variety of methods were used, including cost-increase ceilings, but without much success. In 1983, a new means of payment was introduced, known as the diagnostic related group (DRG) payment system. Under this system, hospital cases are divided into 487 different classes based on diagnosis, age, complications, and the like. When a patient receives care, one of these DRGs is assigned to the patient and the hospital receives a predetermined amount for that DRG irrespective of the actual cost incurred in delivering the services. This system of payment encouraged the hospitals to deliver care efficiently at lower cost. Many of the commercial insurance companies such as Blue Cross and Blue Shield have also adopted this method of payment for the hospitals.

Emerging Trends

During the past decade, a few key trends have emerged. A shift to managed health care from tradi- tional indemnity insurance is expected to continue. This has resulted in the growth of health main- tenance organizations (HMOs) and preferred provider organizations (PPOs), which now account for as much as 60–70% of the private insurance in some markets. Employers have also been changing health care benefits for their employees, increasingly going to so-called cafeteria plans, where em- ployers allocate a fixed amount of benefit dollars to employees and allow them to allocate these dollars among premiums for various services. This has resulted in increased out of pocket costs and copayments for health care for the employees.

Medicare has reduced payments for DRGs and medical education to the hospitals. It has put many health care systems in serious financial trouble. The increase in payments is expected to stay well below the cost increases in the health care industry. These trends are expected to continue in the near future (Sahney et al. 1986.)

Since the advent of the DRG system of payment, the length of stay has continually dropped in hospitals from an average of over 10 days in the 1970s to below 5 days. Hospital admission rates have also dropped because many of the procedures done on an inpatient basis are now being per- formed on an ambulatory care basis. Inpatient admissions and length of stay are expected to continue to decline, and ambulatory care is expected to continue to grow over the next decade.

Medically indigent people who have neither medical insurance nor coverage by federal and / or state programs continue to place a serious financial burden on health care institutions. In the past, hospitals were able to transfer the cost of indigent care to other payers under a cost-based payment system. But under the DRG-based payment systems, hospitals are unable to do so.

Hospitals have been experiencing shortages in RN staffing, especially in inpatient units and emer- gency rooms. The nursing shortages can be attributed to low starting salaries for nurses and potential nursing students opting for other carriers with regular daytime work hours. Nurses also have other opportunities within health care aside from the inpatient setting that do not require night shift rotation or weekend coverage. The nursing shortage is projected to continue for positions in inpatient units.

Another trend in the health care industry has been an increase in ambulatory care clinics and ambulatory surgical centers. Hospitals have developed freestanding ambulatory care centers as a means of penetrating new markets by providing easy access to primary care services to the growing number of HMO patients.

The other major trend is consolidation within the industry. Hospitals have been facing a bleak financial future. Hospitals have been consolidating to form larger and leaner health care delivery systems to take advantage of economies of scale. Usually there is a reduction in the number of excess inpatient beds and an elimination of duplicate services in a community as a result of these mergers. Industry consolidation is expected to continue in the coming years. It is expected that in most large cities only a few large health systems will account for most of the inpatient health care services.