The Cost Conundrum
By Haydn Bus
Strategies abound for holding down exploding health care expenditures. But which will prove most effective?
Strategies abound for holding down exploding health care expenditures. But which will prove most effective?
For decades, aggregate U.S. health care costs have risen far beyond the growth of the rest of the economy. From 1940 to 1990, health care spending increased at a rate of roughly 4 percent a year, rising from 4.5 percent to 12.2 percent of the U.S. gross domestic product (GDP); Health Affairs reported earlier this year that overall health care costs in 2006 represented 16 percent of GDP.
Employers are feeling the crunch. Last fall, the consulting firm Towers Perrin projected that health care costs for U.S. employers would increase by 6 percent in 2008 to a total average cost of roughly $9,144 per American worker.
Those increases have the potential to slow down large sectors of the American economy, says Neeraj Sood, an economist for RAND Corporation who studied the impact of health care costs from 1987 to 2005. “Big industries with a high benefit share grew slower when health care costs were rising,” Sood says.
The continuing growth of health care expenditures also represents a challenge for advocates of universal coverage. Rick Pollack, executive vice president for the American Hospital Association (AHA), says that unless health care providers, the federal government and other players embrace a wide variety of cost containment strategies, universal health care coverage will be nearly impossible to achieve.
“I don’t think we get to coverage without addressing affordability,” Pollack says. “Policy-makers and the public are going to be reluctant to expand coverage to the 47 million Americans without it. You’ve got to give people confidence that we’re working on affordability.”
Republican presidential candidate Sen. John McCain, who supports pay-for-performance strategies as well as giving patients a broader role in their health care choices, has made controlling costs the centerpiece of his health care plan. At a Mayo Clinic-sponsored conference earlier this year, McCain’s chief economic adviser Douglas Holz-Eakin argued that rising cost, and not universal coverage, is the central problem facing the American health care system.
“Reform not focused on cost is wrong. Insurance is a mechanism for shifting around who pays,” Holz-Eakin said. “The problem is that the bill is too big.”
Costs per employer are rising at the same time baby boomers near retirement age and begin using an ever-greater share of health care resources. The Medicare trust fund is expected to begin paying out more in benefits than it takes in this year, and is projected to be exhausted by 2019.
“The pressures that this is going to place on our system are going to be unprecedented,” says Ken Dychtwald, an expert on aging who runs the California consulting firm Age Wave. “We’re going to have to do an excellent job at the lowest possible cost.”
But while the chorus to contain health care costs receives near-unanimous support across the political spectrum, there is little consensus among experts about the most effective strategies to slow the growth in health care spending.
Advocates of pay for performance argue that by rewarding providers for quality outcomes and not for piecework, the health care system will be realigned to curb wasteful spending and reduce medical errors. Other experts argue that pay-for-performance measures need to be merged with clinical improvements, which they say will ultimately drive cost containment via innovation and the adoption of more evidence-based medicine techniques.
Proponents of consumer-directed health care believe that giving patients more control over how dollars are spent will force them to make tough decisions about their health care expenditures and ultimately drive down costs. Meanwhile, advocates of an integrated “medical home” approach designed for high-cost patients with chronic conditions say incentives that reward providers for keeping patients healthy and out of the hospital have the most potential for reducing cost and improving outcomes.
Can Pay for Performance and Quality Coexist?
Pay for performance, or value-based purchasing, is often touted for its potential to both improve outcomes and bring down costs. By rewarding providers for hitting quality and safety goals, advocates say, the federal government and other payers will ultimately drive down costs by reducing medical errors and other systemic waste.
The pay-for-performance movement is gathering steam; in October, the Centers for Medicare & Medicaid Services will stop paying for several avoidable medical mishaps, often referred to as “never events,” and many insurers, including behemoth Wellpoint, have followed suit. John Sheils, senior vice president of the health care consulting firm the Lewin Group, believes that pay-for-performance initiatives will take center stage in lowering costs. Currently, Sheils says, Medicare and other payers reward providers for unsatisfactory results, creating misaligned incentives that don’t encourage efficiency.
“Changes in incentives are the only thing that’s really going to have a meaningful impact on costs,” Sheils says. “Thirty percent of what we provide under Medicare has no apparent value.”
But while the AHA supports pay for performance in theory, Pollack warns that much of the cost that hospitals incur for services will be hard to reduce simply by improving outcomes. “Sixty percent of a hospital’s budget goes to labor costs,” Pollack says. “A big hunk of what drives cost are not things we can control, like technology and pharmaceutical. There’s also lots of cost wrapped up in compliance.”
Another argument holds that linking pay-for-performance techniques with evidence-based medicine will lead to lower costs. Variation in care is one of the biggest contributors to rising costs, says Glenn Steele, M.D., CEO of Geisinger Health Care, an integrated system in Danville, Pa. For the last 18 months, Geisinger has offered patients a flat price for procedures ranging from coronary artery bypass to hip and knee replacement. The price includes the estimated cost of the procedure as well as recurring costs for the next 90 days. The hospital then devises a series of evidence-based protocols for each procedure, which are decided by a hospital committee and are expected to evolve as new research emerges.
“We’re taking a significant amount of length of stay out of our average,” Steele says. “And we’re decreasing the hospitalization rate significantly.”
But Sheils argues that clinical effectiveness gains, while yielding better health outcomes for patients, may not bring down costs on their own. A recent working paper published by John A. Romley and Dana Goldman from the National Bureau of Economic Research analyzed mortality rates for pneumonia in Southern California hospitals and found that “a quality improvement from the 25th percentile to the 75th percentile would increase costs at the average hospital by nearly 50 percent.”
Health care costs have risen beyond the rate of inflation chiefly because of improvements in care, Sheils says. He argues that pairing clinical effectiveness with pay for performance may not bring the results many hope for.
“New technologies come in, and that raises the bar for everybody,” Sheils says. “With clinical trials research programs, there’s little point in doing that in conjunction with cost control and to think that will save money if you don’t also implement changes in incentives” for patients, Sheils says.
Patients should also be mindful that rising health care costs in recent decades signify transformative improvements in care. “Health care does more for you,” Sheils says. “It isn’t realistic to expect it to grow at the rate of inflation. A banana in 1980 is the same as a banana today, but health care is totally different now.”
The Patient Consumer
Advocates of consumer-directed health care argue that rising costs are directly related to the disconnect between patients and their health care choices. They maintain that costs will be reduced only by empowering patients to make better choices via control of their health care expenditures and more access to health care price information.
That notion has small but growing political support; the Healthy Americans Act, sponsored by Sen. Ron Wyden (D-Ore.) and co-sponsored by 14 senators from both parties, would encourage Americans to purchase insurance plans using, in part, an “employer-shared responsibility payment.” That payment would replace standard benefit packages and encourage consumers to look around for the most appropriate coverage.
With regard to price transparency, the AHA’s Pollack notes that several state hospital associations—including those in Colorado, New Hampshire and Wisconsin—offer residents thorough pricing information from their member providers. Pollack says Wisconsin’s PricePoint System, which allows consumers to compare prices for specific procedures across the state and in their county, is a model for other states. But he adds that other health care players will need to embrace transparency as well.
“Insurers need to do it,” Pollack says. “If I’m going to shop in terms of where I want to go, I’m less concerned with what hospital is going to charge” than what the out-of-pocket costs may be.
Skeptics say that price transparency and consumer empowerment will not be enough to drive systemic change. Michael Von Korff, M.D., a senior investigator for Group Health’s Center for Health Studies in Seattle, believes that many Americans will be either unwilling or unable to comparison shop for a hip replacement as they would for a new car.
“The idea that market mechanisms are the way to save costs—this is all a theoretical concept,” Von Korff says. “There are so many problems with market-based approaches. In a large percent of the population, there’s no competition. They won’t go from doctor to doctor to price shop.”
A variant of the consumer-directed approach, endorsed by the Lewin Group’s Sheils, would encourage consumers to make more reasonable choices by creating a “gatekeeper,” or a clinician responsible for determining the best course of action for a given patient. And that’s the key difference between this model and managed care: Clinicians are put in the driver’s seat, not insurers. If patients decide to see a specialist outside of that framework, Sheils says, they would be able to, but only by paying sizeable out-of-pocket fees. A gatekeeper model would also encourage patients to consider the efficacy of existing procedures against newer and more expensive options, Sheils says.
“Most people prefer to have no restrictions on their health care at all,” Sheils says. “Without realignment of incentives, costs will go up.”
Chronic Disease and the Medical Home
The gatekeeper approach is often paired with the concept of the medical home, which is designed to coordinate a patient’s care through the various providers they encounter while also offering education and support services. In theory, clinicians and providers would ultimately be rewarded for keeping patients healthy and avoiding costly hospital stays.
Advocates of the medical home, including Von Korff and Geisinger CEO Steele, believe the approach holds the most promise for patients with chronic disease who utilize a disproportionate share of health care resources. According to the Centers for Disease Control and Prevention, 133 million Americans suffer from diabetes, heart disease and other chronic conditions, and they account for 75 percent of the nation’s $2 trillion health care costs in a given year.
Up to now, most medical home projects have been carried out in integrated systems like Geisinger, which employs many of its physicians and has more flexibility to implement change. Some insurers are beginning to look at the model, though, including United Health Group, which launched a medical home pilot program last year.
“A lot of employers have realized that health care costs are driven by high-cost patients,” says Von Korff. “High-cost patients are seeing a lot of different specialists, and nobody’s really coordinating their care. If somebody were just responsible for coordinating their care, we could save a lot of money.”
The Seattle center’s Improving Chronic Illness Care (ICIC) program targets patients with congestive heart failure, diabetes, asthma and depression, offering a mix of educational programs for patients and regular telephone contact between providers and patients, with the aim of reducing overall hospital visits. An independent RAND analysis of the ICIC’s efforts from 1999 to 2003 found that the program helped improve outcomes while reducing hospital days by 35 percent for patients participating in the survey.
“With the question of how you contain costs, how to organize chronic disease care is central to that,” Von Korff says.
Von Korff concedes that some chronic disease management programs have not saved money, especially for patients with more than one chronic condition. It’s difficult to hit multiple targets for a patient with a variety of needs while also saving money, he says.
Still, the Center for Health Studies is in the midst of expanding an advanced medical home project from one clinic to Group Health’s entire Pacific Northwest service area. At Geisinger, buoyed by the early success of the medical home model in one clinic, Steele plans to expand the program to 13 additional sites in Pennsylvania.
“I see the advanced medical home as a very promising model,” Von Korff says. “We need to shift incentives, so what’s incentivized is taking care of people rather than doing procedures.”
And the AHA’s Pollack says the medical home, or coordinated care, model holds some promise for reducing costs—especially if paired with a realignment in incentives to reward more providers for healthy outcomes. “Payment incentives need to be arranged in a way that makes more sense,” Pollack says. “With the reimbursement for sick care on an episodic basis, the incentive is for everyone to do more.” Ω
- is staff writer for Hospitals & Health Networks.
This article 1st appeared in the June 2008 issue of Trustee Magazine.
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