Funding Healthcare System - Thesis Example

?Funding Healthcare System, Sharing Risk and Portfolio Theory Funding Healthcare System, Sharing Risk and Portfolio Theory Introduction Health care systems should ever remain reliable and sustainable. Sustainable healthcare systems are often reliable to capital, human, and consumable resources. Achieving these measures, require input from financial resources that would support purchase of equipment, building structures, compensating health service staffs, and paying for drugs among other consumables (Glied and Smith, 2011). Therefore, there is a need to understand how these finances are generated and managed that often involves revenue collection processes and pooling of funds (Grossman, 2011; pg. 10). These processes are vital for the policy makers as well as planners who often face challenges in designing health care funding systems towards meeting the specific social, economics, and political objectives. Many countries are ever under constant pressure in issues related to social policies since they often experience increased expenditure and scarce resources. Nonetheless, the policy makers must analyze the following three options: increasing health care funding and containing costs or both. The heath care funding and expenditure crisis have introduced radical changes in the organizational and funding mechanisms within the health care sectors (Grossman, 2011; pg. 12). Since the 1970s, the cost containment is the principal driving factor in the discussion of the health care policies especially in the industrialized nations. Despite the underlying challenges in funding health care systems, an articulated and a well balance budget will provide sufficient revenue towards managing health care systems. Notably, nations have restrained themselves from bulk revenue borrowing; otherwise, economies have shift to sound economic policies with focus on revenue policies. Can these changes produce sufficient and sustainable health care funding systems? Literature Review Government or associated organizations often pay the bulk of the funding of the health care services. The major part of these funds is generated from the tax collected from the citizens of such nations. For instance, in the United Kingdom has a single payer system that governs its healthcare systems (Grossman, 2011; pg. 72). The UK taxation and health care funding system take funds directly from the government to the health care systems. In other nations like Germany and France, the government collect tax from the citizens and only fund part of the health care systems towards paying individuals and employees among other involved costs. In other nations such as America, a certain portion of the health care system is often market based. In the market based funding systems, the health care systems are paid for by the private entities including employers and individuals. Moreover, the market-based systems require governments to provide health care to the vulnerable persons (Elton and Gruber, 1999). For example, in the United States, it is the responsibility of the federal government to fund health care systems towards supporting the disable and the elderly through its federal supported Medicaid program. On the other hand, the federal and state supported Medicaid program aims at covering the health care services for the low-income earners. These two different health care funding approaches have their different distinct applicability within the health care sector. Individuals and private organizations generally deliver the market-based systems. Moreover, a part of the systems is usually subjected to a certain level of competition. Market base funding systems is often open to many suppliers, providers, and payers as well as persons with insurance that aims at serving their specific medical needs (Glied and Smith, 2011). In such funding mechanisms, doctors may be given a benefit of practice as a guideline that direct them of when and what different treatment to be applied; however, they are ever free in making care decisions depending on individual needs. Additionally, the decision should be based on the case-by-case basis. The main disadvantage of this funding system is that, in cases where patients and physicians have free choice, health care coordination can remain quite challenging. In such cases, duplication of services may occur. The market based health care funding systems often offer financial incentives to the developing new medical advances; therefore, the progress is usually greater since they readily create new advances for the patients. However, lack of adequate provisions will ensure basic health care coverage levels hence hindering some people from accesses the health care services. In these cases, the market based health care funding systems tend to offer “safety net” programs towards providing government funded coverage that help citizens who are unable to afford private market insurance especially the poor, disable, and the elderly. Different nations have different forms of market based health care funding systems. Singapore has the 3M programs and Brazil has what it calls Sistema Unnico de Saude, while the United States has the Medicare, Medicaid and the State Children’s Health Insurance Program (SCHIP). These are some safety net programs. Notably, the safety of the net programs can sometimes not reach everybody without coverage (Elton and Gruber, 1999). For example, in the United States, there are over forty-seven people without health insurance. This population involve lower income earners or the lower wage-working individuals who are unable to afford coverage. However, the program also engulfs wealthy persons who have opted for the program. Many governments financed systems usually tend to provide everyone within their country with coverage that provide access to some basic health care levels. These who opt to pay for these systems often do so through taxes among other charges. Notably, in cases of government-financed systems, the government may opt to do so through its own funded systems. However, others may contract some organizations to provide such medical services (Glied and Smith, 2011). For instance, the government of the United Kingdom often offer market based health care funding systems to itself while nations including Germany, Japan, and the United States often contract other organizations to provide their government financed programs, Medicare and Medicaid to the citizens (Grossman, 2011; pg. 17). The accessibility of the government financed health care programs, makes governments pose numerous limitations to the health care services offered to patients and doctors with the aim of keeping the cost down (Elton and Gruber, 1999). Additionally, the government-funded programs also tend to take longer for the newly intended advances to be reimbursed and accepted by governments thereby making them available to both doctors and patents. Thus, the diagnostics and treatments offered may not be the same as in the case of the market based health care funding systems. For instance, the united states’ market based health care funding system provides care services to patients with cancer from the earlier diagnostic stages than in other European nations whose main health care funding are mainly government based. Additionally, the government financed health care systems also tend to provide fewer incentives hence they are poor in encouraging any new medical advances. Managing Health Care Cost Both the government financed and market based health care systems aims at managing the overall health care costs. However, there main difference often lies in the way both systems approach the health care management costs (Glied and Smith, 2011). The market based health care funding system primarily lies on the companies competing force particularly against each other especially towards introducing a new product and services to customers. Notably, customers often make their independent choices based on many influencing variables that usually including convenience and quality of the products (Crichton, Hsu, and Tsang, 1990; pg. 114) and services offered by the service organizations or the health care institutions. It should be noted with concern (Crichton, Hsu, and Tsang, 1990; pg. 115) that most of the customers do not peg their choices of service in relation to the organization only on cost. Notably, many health care programs that are government funded are never competitive; rather they vary depending on the tools that keep the costs of health care provision down. However, most of these tools that government funded health care programs are pegged often harm the continued medical progress. Nonetheless, some of these government operational tools are useful since they help in controlling health care costs without retarding advances (Elton and Gruber, 1999). Either of the effects of the government-funded tools often depends on the mode of application to any health care system or program. Some of the processes or approaches that effect innovations within the health sector include: Firm budgets that aim at limiting the devoting the limited government resources towards maintaining the health care systems and programs in any budget cycle Providing direct price limits on the newly invented health care programs including new diagnoses and treatments The innovative programs should provide profit caps The other mechanisms involve importing lower priced medicines among other medical equipment from relevant authorise and countries particularly from approved manufacturers The use of relatively cheap substitute health care products and equipment Governments should adopt highly restricted lists or restrictive formularies from which medicines are reimbursed Finally, the governments should introduce penalties to physicians who over spend or with excess spending above threshold set by any health care funding system. Nations and the private players within the market based health care funded programs may adopt the use of other approaches designed towards helping constrained health care spending mechanisms especially those that are harmful to innovation (Elton and Gruber, 1999). Some of the designs that should be incorporated into the health care programs include the use of generics where applicable and reimbursement of the health care that are associated with illness episodes instead of the use of a la carte reimbursement for an individual treatment intervention. These reimbursements or the capitations care episodes should be adequate, and their outcomes measures should aim at providing patients with quality health care services that meet particular health care need of patients (Glied and Smith, 2011). The episode based reimbursement aims at stimulating the competition within the issuance plans and helping in keeping health care costs affordable to the low-income earners. In addition, the patient centric cost control efforts are vital. Most of these efforts often aim at placing greater interest and focus on wellness and prevention towards reducing the need for acute health care services in patients (Glied and Smith, 2011). Alternatively, these intended efforts (Elton and Gruber, 1999) should be flexible formularies that allow physicians to prescribe treatments outside the approved list if they are of the view that such prescriptions are better for patients, or the effort provides average or low cost information as per the physicians’ analysis. Advancing the Medical Frontiers The most significant difference between the market based, and the government funded health care systems are the ability of these systems to generate medical advances independently towards initiating new and effective diagnoses and treatment to patients (Wolper, 2004). Numerous studies have proved that innovations often suffer intensely under the government funded health care systems. The main reason for this suffering is the combinations of budget ceiling and price control among other restrictions that often reduce incentive invest within the medical research sectors. For instance, the European nations used to discover and develop numerous new medicines that America did; nonetheless, this is never the case anymore (Elton and Gruber, 1999). Numerous factors that have accelerated these changes including changes in the market taxation policies, in the United States and the price control advent in Europe. From the year 1993 to 1997, ninety new medications were discovered, developed, and launched in Europe. On the other hand, during the same period, the United States only launched 66 new medications. In the later year, between the year 2001 and 2005, the European Medicine Price Control took a hold that led to a reduction in the discovery and production of new drugs from 90 to 55. During the same period, the United States launched additional new drugs leading to an increase from 61 to 66 new drugs. It should be noted that, in the market based health care funding systems, the investors are ever willing to finance medical research towards introducing new drugs because they know that the success of such research work will lead to new advancement to both doctors and patients. Therefore, market based health care funding systems aims at fostering more health care advances. Additionally, the market based health care helps the advances to reach patients and their doctors faster than in a situation where there are funding towards researching for new drugs and health care services. The Modern Portfolio Theory The modern portfolio theory or the portfolio theory is a financial theory that attempts to maximize portfolio expected return for a particular portfolio risk. Alternatively, the theory aims at minimizing the equivalent risks within a given expected level of returns (Grossman, 2011; pg. 162). However, the portfolio theory requires careful choosing the proportion of the involved assets. Despite it has found wide application in numerous financial industries and its advents winning Nobel memorial prize for the invention and applicability of the theory (Elton and Gruber, 1999), for the recent past years, the basic assumptions of the theory have faced numerous challenges within the behavioural economics. Literature Review of the Theory Harry Markowitz The modern portfolio theory or simply the portfolio theory through his paper name the “portfolio Selection” that appeared in the 1952 Journal of finance. Prior to the Markotwiz’s advent, almost all investors focused on assessing individual security and risks in constructing their portfolios. The standard investment required the investors to identify the securities that prevailed the best opportunities towards gain. These securities also required minimum risk (Glied and Smith, 2011). Combination of these standard investment advices led to the introduction or advent of the portfolio. Following the advices upon which the portfolio was constructed, the investors may conclude that, their railroad stocks are subjected to good characteristics of risk rewards, and these are what define the entire portfolio. However, perception was sometimes considered baseless or rather foolish. Nonetheless, Markowitz formalized the idea into the portfolio theory (Grossman, 2011; pg. 172). He provided detailed diversification mathematics where Markowitz proposed that investors should focus on selecting their portfolios based on the overall risk reward characteristics as opposed to compiling their portfolios from the securities that each individual has independently attractive risk reward characteristics. In other words, according to Markowitz, the investors should select their portfolios not individual securities. The theory is purely mathematical formulation that formalizes the diversification concepts in investing. The theory aimed at selecting investment assets that are of lower risks than if the assets were identified individually. The main idea within this concept is that the different assets often changes in value differently or in different ways (Elton and Gruber, 1999). For instance, extending the stock market prices often moves differently from then prices within the bond market. Therefore, a collection of the identified assets can face lower overall risks as compared in the individual risks. However, diversification often lowers the risks even when the returns of the assets are not correlated negatively even if they may be correlated positively. Technically, the portfolio models allow the returns on assets to be distributed in the normal distribution function manner (Gillies, 2003; pg. 61). Generally, the distribution often takes an elliptically distributed random variable that often defines the risk return on standard deviation. Notably, the model portfolio returns is often weighed as a combination of the return assets. Combining different assets with perfectly different positive correlation make the theory reduce the total variance of the portfolio return. Additionally, the portfolio theory assumes that investors are efficient of markets and ration. The theory was developed in the 1950s and advanced in the early 1970s. Portfolio theory was regarded as an indispensable mathematical modeling in the financial field. Since the of the portfolio theory, the theory has received numerous criticisms. Some of the criticisms are based on the theoretical contribution of the process (Holtz, 2013). Additionally, some criticisms have relied on the fact that the financial returns never follow the Gaussian distribution or the symmetric distribution. The correlations between classes of assets are not fixed, but they often vary depending on the external variables. Additionally, there are numerous growing evidences that marketers are not efficient, and investors are not rational. The Concept of the Portfolio Theory The fundamental portfolio theory is that assets within an investment portfolio should not be selected individually, but rather an individual’s own merits. Alternatively, it is vital for investors to consider how changes within given investment areas are affecting each asset. Notably, each asset is often considered being changing in prices relative to the price changes within the portfolio. Therefore, according to the portfolio theory, investing is often a trade-off between the risk of investment and the expected return (Niles, 2011; pg. 123). Furthermore, the portfolio theory has the idea that the assets with higher return expectations often attract high risks (Glied and Smith, 2011). For instance, a given amount of risk, the portfolio theory will perfectly describe the criterion to apply towards selecting a portfolio with highest possible expected returns. Alternatively, for a particular expected return, the portfolio theory will provide a clear avenue to explain and describe the adequate process of selecting portfolios will low possibilities of risk. Notably, the expected return targets should never be more than the highest returning (Crichton, Hsu, and Tsang, 1990; pg. 142) available security unless there are negatives for the possible assets. Thus, the portfolio theory is a form of diversification. In most cases, certain assumptions among other specific quantitative risk and return definitions are identified and explained with portfolio theory with the main to identify the best possible diversification strategies. The Portfolio Theory Applied To Science Research Portfolio The portfolio theory can be applied in determining how objective funding allocation can be done in the health care system towards improving risk or reward trade off in reducing immense loses. Many health care institutions have ever adopted the biomedical research spending. For instance, the National Institute for Health (NIH) spends approximately $ 30 billion annually; therefore, there is a need for these institutions to develop constant evaluation of their spending particularly in a way the adequately reflects multiple factors including the burden of the diseases. Despite the application of the financial portfolio theory in the health care systems, the theory has posed challenge especially in the funding allocation decision making. For instance, both the Massachusetts institute of Technology (MIT) and Brigham and Women’s Hospital (BWH) have at some points responded to the challenges developed by applying the financial theory to the National Institute for Health funding allocation decisions. However, the financial industries are widely used, and the portfolio theory is an avenue that offers a systematic objective and reproducible framework where the risk or the reward trade off funding allocations is optimized in line with quantitative measures of disease burden including the “years of life lost” (YLL). Applicably, the portfolio funding theory should be analyzed along the contribution along independent variables. Moreover, there should be analyses of the relationship between the identified variable with their similarity with the managing an investment portfolio. Apparently, the challenges that have been twiddling as the weaknesses of the identified of the portfolio theory may as well be regarded as biases that most researchers have had during their finance portfolio research projects. Therefore, there is a need (Crichton, Hsu, and Tsang, 1990; pg. 194) to conduct research on the funding of the health care systems using the portfolio theory without any degree of biasness. For instance, funding portfolio theory has been used to research on the funding systems of numerous health care institutions. Some of the health care institutions that have deployed the same principles include the MIT Operation Research Center, the MIT Computer Science and Artificial Intelligence, Burn and Critical Care Division at BWH Laboratory, and Dr. James Watkins among other institutions. Most of the institutions that used applied the portfolio theory identified weaknesses associated with this theory (Alder, 2009). However, most among the contributors or researchers in the same projects stated that the shortcomings identified with the portfolio theory were mainly associated with underlying biasness that some researchers used during the research practice. All the cases herein applied competing choices for limited resources and investment to invest thereby forcing trade-offs. However, the expected risks, returns, the lost cost opportunities, and the value of serendipity are vital factors to be considered in applying the funding or financing portfolio theory. The health care funding research using the fundamental of the financial portfolio theory often requires estimated of efficient frontiers. Notably, it is vital to use the broad disease groups’ data especially from the National Institute for Health funding allocation between any given periods of interest. Within a given set, the data should be subsequently changed to identify the YLL changes that would facilitate the estimation of the efficient frontier (Levine, 2009; pg. 256) with a statistical construction that would constitute the optimal trade-off between reward and YLL denominated by various funding portfolios or allocations. Portfolios that are on the efficient frontiers often corresponds to the funding allocations that aim to minimize the expected investment returns or rather the return on investment (ROI) within a specific risk level. The ROI can be defined as the subsequent expected improvements on the YLL. On the other hand, the identified level of risk may be defined as subsequent improvement volatility on the YLL. The portfolio theory is a sure way of optimizing funding allocation in the public health care. The application of the portfolio research will automatically lead to the empirical results that can be well related to the reduced risks and higher expected improvements in relation to the YLL. Apparently, the current NIH funding allocations is actually underperforming (Salo, 2011; pg. 85). This performance is not even within the benchmarks of a basic portfolio that includes the equal weight allocation. These are results of the above studies. However, from the same studies, the estimated efficient frontiers indicate that there is high degrease in the average YLL per unit risks. These results can be obtained or achieved through other portfolios that must be based on the efficient frontier. The portfolio theory can also be applied in the disease area. However, it should be noted that there are significant differences between areas of disease in the research risks, productivity, and spill over to other areas within which the research is interested (Elton, 2010). The portfolio theory is likely to allow the identification of different funding allocations that may lead health care systems into essential progresses of reducing the disease burden even without increasing funding (Baggott, 1994). It is essential to note that the use of the funding portfolio theory is significant in measuring the YLL improvement towards increasing funding from the leading health care funding institutions. Therefore, it is appropriate to conduct adequate health care funding research using the portfolio theory to ensure that policy makers understand the underlying implications of the research empirical results. Well-articulated results are sure ways of pushing for essential and appropriate for the health care institutions especially the expeditions of the NIH. Numerous researchers have acknowledged that YLL is not the perfect measure that can be used in measuring public data since the data obtained from the same have the limitation that do allow the researcher to eliminate some factors. However, the application of the YLL often allows improvement thereby improving other funding sources, behaviour change, and public health policies. Additionally, the YLL has other limitations including the effects of the statistical estimation error, the assumption on the investment returns, and the lack of well-articulated policy objectives in lines with in line with a burden of disease (Willis, Reynolds, and Keleher, 2009). Nonetheless, the portfolio theory is an optimistic research method allows transparent, rational, and reproducible that allows evaluating research-funding allocation. Notably, Economist Harry Markowitz developed efficient frontier-central derivation that can applied in the modern financial portfolio theory towards health care funding research. Conclusion The national institutes of health have lately faced numerous funding problems especially funding treatment studies. The current funds are good enough to fund the “valley of Death” particularly between the bench science and clinical trial. The main reason for these funding problems is highly pegged on the financial constraints. For instance, the researchers at both Brigham and Woman’s Hospital and MIT in Boston have published a striking theory related to the NIH funding. Moreover, these researchers have showed concern on how other investment companies handle the portfolio theory. Regardless of these researchers contributions, the portfolio theory is a sure way of understand the complete investment calculation returns. Authors among other contributors of the in the health care funding using the portfolio theory have admitted that this form of funding has “years of life saved” particularly over it probability of its simplistic measure. The current health care funding is questionable. Notably, currently the agency rates project according to proposed scientific quality, public needs, and probability of the scientific progress, the need to support people, facilities, and equipment, as well as the need to diversify research. Except for the first criterion, all other current funding criteria are not directly related with improving the healthcare services, not at least on the individual patient level. Despite the projected advantages associated with the portfolio theory in relation to funding of the health care systems, it also has some shortcoming especially in changing funding systems of some chronic diseases as such as cancer. Nonetheless, financial portfolio theory is a sure way of minimizing the return on investment (ROI), free cash flow, or profit. However, regardless of choosing only a single metric, the theory allows the health care system to choose the metric to minimize. Additionally, the theory will allow comprehensive outcomes than years of life saved since the theory introduces appropriate use of weighted formula that aims at reducing pain and suffering thereby improving the quality of life and years of life saved. Finally, the portfolio funding theory introduces weights determination that requires value judgments that would reduce benefits of new quantitative approach towards allocating funds. Therefore, the portfolio theory is a powerful and hopeful means of improving the status quo of the NIH funding. References ALDER, B. (2009). Psychology and sociology applied to medicine: an illustrated colour text. Edinburgh, Churchill Livingstone. AUDRETSCH, D. B., LITAN, R. E., & STROM, R. J. 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Sudbury, MA, Jones and Bartlett. SALO, A. (2011). Portfolio decision analysis: improved methods for resource allocation. New York, Springer. WILLIS, E., REYNOLDS, L., & KELEHER, H. (2009). Understanding the Australian health care system. Sydney, Churchill Livingstone/Elsevier. WOLPER, L. F. (2004). Health care administration: planning, implementing, and managing organized delivery systems. Sudbury, MA, Jones, and Bartlett Publishers. Read More