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Overview

i Overview of the US healthcare system

The US healthcare industry remains at a crossroads. The healthcare reform legislation passed under President Barack Obama in 2010, officially called the Patient Protection and Affordable Care Act (ACA) but widely referred to in the United States as 'Obamacare', resulted in significant changes in the US healthcare system. These changes included a dramatic expansion in the number of insured patients, contributing to increased demand for services. Many of these newly insured are covered by the joint state-federal Medicaid programme, which generally covers low-income patients as an entitlement programme, and reimburses at the lowest rates in most markets. After four years of Donald J Trump as US President and Republican control of Congress, his promise to 'repeal and replace' the ACA legislation failed both in the legislature and the courts.

The prominent partisan debates over the US healthcare system have been further exacerbated by the 2020 coronavirus (covid-19) global pandemic, the greatest challenge the US healthcare system has faced in decades. The US quickly became the covid-19 capital of the world, with the most infected individuals and reported deaths of any country at the time of publication.2 In the US, the covid-19 pandemic took the largest toll on older Americans, resulting in a wave of infections and deaths in nursing homes and long-term care facilities across the country.3 While many dedicated healthcare providers, emergency service personnel and essential workers quickly engaged in covid-19 relief efforts, the federal government failed to contain the pandemic, and left the 50 states to design their own strategies for containing the virus. State responses varied along political lines, with governors aligned with Trump following his lead of downplaying the virus, and those in 'blue states' adopting more restrictive policies of 'social distancing'.

Since Biden has held the presidency, there has been a significant change in the response to the pandemic. In particular, the nationwide rollout of covid-19 vaccination programmes has resulted in decreases in the spread of covid-19 as well as its mortality rate, which has allowed most if not all states to relax restrictions and regain control of the outbreak. However, the full impact of the pandemic has yet to be determined.

Notwithstanding these challenges, prior to the covid-19 pandemic, the US healthcare system experienced a period of sustained growth of approximately 6 per cent per year over the past several years. The authors expect this pattern to resume once the pandemic is under control. This growth has been coupled with a trend towards consolidation in recent years, which has only intensified due to the increasing difficulty for independent hospitals and medical groups to survive. As a result of these trends, healthcare presents an attractive area for investment in the United States. This will further encourage consolidation, along with an increasing acceptance of for-profit buyers and investors by state regulators and local communities. Financial losses by hospitals during the pandemic will accelerate this trend. The following sections seek to put the larger healthcare services sector in the United States into context, focusing on these and other broad business and regulatory trends, while also understanding the organisational fundamentals.

ii Delivery of healthcare in the United States

Hospitals with inpatient, outpatient and diagnostic capacities are the 'work benches' for the delivery of healthcare in the United States, although the physicians and other professionals who treat patients there are critical parts of the care delivery system as well. Physicians are also sometimes referred to as the 'captains of the ship' in the hospital context, though other non-physician practitioners are gaining prominence in the institutional and community healthcare setting. These include nurse practitioners, physician assistants, certified registered nurse anaesthetists and nurse midwives, among others, licensed in their respective states by the state professional board, such as the medical board or the nursing board, or by the state department of health or another agency within the government.

There is a growing trend towards services provided in other care settings, coupled with a drive towards lower costs, brought into sharp relief by the covid-19 pandemic saturating hospital capacity. This has spurred on the presence and success of telehealth services, which may offer increased efficiency and also lower the total cost of care.

iii Payment for healthcare services

Healthcare services in the United States are paid for primarily by (1) government programmes such as Medicare and Medicaid and (2) private insurance organisations. These public and private organisations are collectively known as 'third-party payers' or simply 'payers'. Most third-party payer arrangements have some element of 'managed care', which means that care is provided subject to utilisation review, such as primary care physicians acting as gatekeepers to specialists. Managed care plans typically enter into contracts with providers to deliver services at a discounted rate, sometimes in exchange for an expectation of increased volume from the payer. Government and private healthcare payers alike in the United States are increasingly focused on the value of services, which has contributed to the rapid expansion of alternative payment models that offer incentives to providers for better care outcomes, and in some cases penalise poor outcomes through reduced payments.

iv Regulation of healthcare

Because the government spends so much on Medicare, Medicaid and other programmes, it has taken aim at fraud and abuse and made concerted efforts to reduce provider misconduct and to recover funds inappropriately paid by these programmes. This regulation is carried out by a number of regulatory bodies. At the federal level, most laws affecting the structure and payment of healthcare are promulgated by the Centers for Medicare and Medicaid Services (CMS). The CMS is a division of the US Department of Health and Human Services (HHS), which has a separate oversight arm – the Office of Inspector General (OIG). (Many state and federal agencies have inspectors general to oversee the operations and fight fraud within the agencies.)4 The OIG fights fraud, abuse and other forms of waste in government healthcare programmes and provides oversight by carrying out audits, investigations and evaluations and develops resources for the healthcare industry.

At the state level, state government agencies oversee issues such as Medicaid rules and payment requirements along with provider licensing, and often also enforce state-level versions of some of the major federal compliance rules and regulations. This two-tiered structure creates a complicated patchwork of healthcare laws, often with significant variations among the 50 states and the District of Columbia.

The healthcare economy

i General

The US healthcare industry is one of the most closely watched and fastest growing sectors of the nation's economy. There are many stakeholders in the US healthcare system, many of which have dramatically differing interests. These include, but are not limited to:

  1. enterprises that operate hospitals and health systems;
  2. manufacturers and developers of medical devices, pharmaceuticals and other biotechnology products;
  3. academic institutions that provide care while training healthcare professionals;
  4. information technology firms, construction companies and other infrastructure providers;
  5. insurance companies, self-insured employers and other third-party payers;
  6. labour unions representing the employees of healthcare organisations;
  7. medical entrepreneurs and investors (including private equity and venture capital) who finance the healthcare system;
  8. healthcare trade associations;
  9. patient advocates and special interest healthcare advocacy organisations; and
  10. patients and their families.

In addition, there is substantial government involvement in healthcare in the United States, with the government serving as a major payer, as well as a provider and regulator in various parts of the market.

ii The role of health insurance

Most medically necessary healthcare services in the United States are paid for by government or private third-party payers, including insurance companies, self-insured employer plans, health maintenance organisations (HMOs), Medicare and Medicaid, TRICARE, the Veterans Administration and workers' compensation programmes. Most third-party payer arrangements are either managed care indemnity arrangements or involve monthly pre-payments known as 'capitation'. Private third-party payers are heavily regulated by state insurance commissioners, or the United States Department of Labor with respect to employer-sponsored plans, known as ERISA plans (short for the Employee Retirement Income Security Act).

Medicare and Medicaid

The two major government healthcare payment programmes in the United States are Medicare and Medicaid. Medicare is a federal programme that primarily provides coverage for individuals who are age 65 and over, disabled or have end-stage renal disease. Medicare is currently the largest (in total dollars) federal healthcare programme, providing health insurance for the elderly and certain other individuals. Medicare offers a number of payment arrangements, including traditional indemnity fee-for-service coverage (Traditional Medicare) and Medicare HMOs, known as Medicare Advantage plans. Medicare beneficiaries may choose between the two types of plans.

Under Traditional Medicare, inpatient services for most hospitals (i.e., other than 'excluded hospitals' that have special status under the law because of their specific types of service, such as cancer care) are reimbursed under the Inpatient Prospective Payment System (IPPS). Under the IPPS, hospitals are paid a prospectively determined case rate based on the patient's diagnosis – a diagnosis-related group (DRG) – which may also include certain add-on payments. Provider-based hospital outpatient services under Traditional Medicare are reimbursed under the outpatient prospective payment system (OPPS), which is also based on a prospectively determined case rate. Outpatient services that are not 'provider-based' are reimbursed under the Medicare Physician Fee Schedule or the ambulatory surgical centre payment rules, which are less generous than the provider-based rules, discussed further below.

Some outpatient procedures can either be performed (1) outside and independent of a hospital (e.g., in a freestanding clinic or physician's office) and are reimbursed under the Medicare Physician Fee Schedule; or (2) in a hospital-affiliated and hospital-operated site included on the hospital's licence and generally referred to as 'provider-based'. Reimbursement for provider-based facilities under the OPPS methodology is generally higher than comparable rates for the same procedures if performed in a freestanding facility under the Physician Fee Schedule. However, to qualify for provider-based reimbursement, the outpatient site must meet a number of requirements, some of which are somewhat onerous.5 A hospital that operates a surgery centre also has the option of operating that facility as provider-based, thereby permitting use of the OPPS payment structure.

Medicaid is a joint state and federal programme traditionally for certain indigent or impoverished individuals who are aged, blind or disabled, or members of indigent families with dependent children that meet income and resource standards set by the state Medicaid agency. Medicaid today covers more individuals than Medicare, making it the largest single payment system in the United States, in terms of persons served.6 The federal government contributes roughly half of the reimbursement for the Medicaid programmes, though some US states with struggling economies receive higher reimbursement than others. Although the rates payable by Medicaid in most states are notoriously low (some falling short of the provider's costs), the rates will be increased for a number of years under the ACA, possibly making the programme more attractive for primary care physicians and others who are either in scarce supply or simply do not wish to treat these low-income patients.

Commercial and private insuranceHMOs and preferred provider organisations

Although there remain some 'pure indemnity' arrangements (wherein the beneficiary is reimbursed for all healthcare expenses he or she incurred regardless of the provider who rendered the care), most third-party payer arrangements involve some element of managed care, meaning that the healthcare services are provided subject to utilisation review procedures such as a primary care physician serving as a 'gatekeeper' for specialists, and typically create certain constraints on the beneficiary's choice of provider, usually as a result of network or panel arrangements established by the payer.

There are two primary types of managed care arrangements: HMOs and preferred provider organisations (PPOs). An HMO typically requires the beneficiaries or members to exclusively use providers that have signed a contract with the HMO to receive a discounted or capitated amount for its services. The HMO will not pay for services provided by a non-contracted provider except when the services were performed in an emergency or the HMO does not have a needed specialist in its contracted network.

PPOs are delivery systems wherein the plan assembles a contracted provider network from which the member can receive care on a discounted fee-for-service basis; however, the beneficiary also has the option of going outside the network if he or she is willing to shoulder a greater share of the cost of care, typically in the form of a higher co-payment. There are also 'point-of-service' (POS) plans, which are a hybrid of an HMO and a PPO. Under a POS plan, the member usually receives capitated care but has the option of receiving care from a non-contracted out-of-network provider if he or she is willing to pay a substantial portion of the provider's fee-for-service charges.

iii Funding and payment for specific services

The ACA's overarching objective was to expand coverage to 31 million uninsured Americans, primarily through the individual mandate, employer mandate, expansion of Medicaid and establishment of subsidies (i.e., tax credits) to purchase plans in the health insurance marketplace established by each participating state, or by the federal government. The law establishes a minimum of 10 categories of 'essential health benefits' for plans: (1) ambulatory patient services; (2) emergency services; (3) hospitalisation; (4) maternity and newborn care; (5) mental health and substance use disorder services, including behavioural health treatment; (6) prescription drugs; (7) rehabilitative and habilitative services and devices; (8) laboratory services; (9) preventive and wellness services and chronic disease management; and (10) paediatric services, including oral and vision care. However, other types of healthcare services for adults, such as dental care and vision care, are typically paid for by individuals personally or through other types of private insurance plans that cover such services.

iv Pricing transparency

At the end of the Trump administration, HHS issued a final rule called Transparency in Coverage as part of the federal government's initiative to increase transparency in healthcare pricing. Typically, healthcare prices are negotiated between insurers and providers and not easily accessible, but these new rules require health insurance issuer and group health plans to disclose certain pricing and cost-sharing information and publicly disclose a variety of information about in-network, out-of-network and pharmaceutical prices. Some of these hospital-specific requirements came into effect on 1 January 2021, and CMS has begun sending warning letters to hospitals not in compliance. Similarly, the No Surprises Act, enacted in December of 2020 (and updated on 1 January 2022) by both the HHS and the US Department of Labor and Treasury, was implemented to provide protection from patients incurring surprise costs for healthcare and cost-sharing payment obligations. It requires that consumers have the right to receive a good-faith cost estimate prior to scheduled services, and access to the patient-provider dispute resolution process.

Primary/family medicine, hospitals and social care

i Hospitals and primary care

As noted above, hospitals are the work benches for the delivery of healthcare in the United States. Further, the Emergency Medical Treatment and Labor Act, a federal law mandating that anyone who arrives at a hospital emergency department must be medically screened and provided stabilising treatment, regardless of their insurance status, has contributed to the use of hospital emergency departments for all types of care. However, under the ACA, there has been an increased focus on primary care, with expansion of the number of insured patients, thereby increasing the number of patients able to access primary care. Provisions of the law have also specifically addressed the types of primary care and other preventive services that must be covered by insurance and have set minimum payment rates for primary-care Medicaid services.

There have recently been further developments in this area, as innovators from the technology industry have become more involved in the delivery of healthcare. Capitalising on improvements in technology in this way can present opportunities to offer increased access to primary care services, particularly in areas where providers are scarce or patients are not easily able to travel to provider offices and as a result of the isolation and social distancing measures associated with the covid-19 pandemic. There has been a growing movement towards telemedicine, whereby providers and patients interface virtually rather than through an in-person office visit. The covid-19 pandemic accelerated this movement, as telemedicine became necessary overnight. States facilitated the use of telemedicine by, for example, expanding scope of practice, relaxing in-person visit requirements and allowing controlled substances prescribing via telehealth.

ii Electronic health records and privacy

Although many healthcare facilities and providers in the United States have individually adopted use of electronic medical records, there has not yet been a sustained effort to implement a universal electronic medical record.

Healthcare organisations are subject to a plethora of federal and state privacy and security laws pertaining to health information maintained by the organisation. The most comprehensive federal law that applies to healthcare organisations is the Health Information Portability and Accountability Act of 1996 (HIPAA), as modified by the Health Information Technology for Economic and Clinical Health (HITECH) Act. These laws and their implementing regulations provide federal protections for the privacy of individually identifiable health information or protected health information (PHI) held by covered entities (e.g., health plans, healthcare clearinghouses and most healthcare providers) and give patients an array of rights with respect to such information. The HIPAA Security Rule specifies a series of administrative, physical and technical safeguards that covered entities must implement to ensure the confidentiality, integrity and availability of electronic PHI.

HIPAA, along with other federal and state privacy and security laws, imposes liability on healthcare organisations for technical violations of the required privacy protections and security safeguards, and for any unauthorised access, use or disclosure (i.e., breach) of confidential health or medical information. If a healthcare organisation violates HIPAA, the Secretary of HHS may impose civil monetary penalties or corrective action plans on a covered entity and the business associates with which it contracts. The secretary may also refer criminal violations to the Department of Justice (DOJ). State attorneys general also have a right to bring a cause of action on behalf of residents of their states under HIPAA. State laws vary considerably, but in some states, a healthcare organisation is also subject to state civil penalties and damages in any action brought by an individual whose privacy was compromised as the result of a violation of state privacy law. In addition to any potential liability for their own actions, healthcare organisations may also bear liability for the actions of their subcontractors for violations of state privacy laws. Notably, during the covid-19 pandemic, HHS issued a notice that it was exercising its enforcement discretion to permit some sharing of PHI that would otherwise constitute a HIPAA violation, as described in Section IX, below.7

Since the 2018 passage of the European Union General Data Protection Regulation (GDPR) imposing rigorous requirements on companies that monitor or process the personal data of European citizens, some US states have passed similarly stringent privacy laws, leading to many healthcare providers adjusting their business practices in efforts to comply. One of the more comprehensive of these laws is the California Consumer Privacy Act of 2018, which provides California residents with similar rights to those that GDPR provides to EU citizens, including the right to access personal data an organisation has collected and the right to have that personal data deleted.