Whack a Mole and Other Approaches to Health Care Cost

Containment

Merton D. Finkler, Ph.DLawrence University

The Agenda

A Brief History of Health Care Cost Containment Efforts

Strategies That Don’t Work Three Potentially Successful Strategies Guidelines for Selecting the Right Cost

Containment Strategy

Whack a Mole Game

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Hospitals Physicians Drugs Insurance NursingHomes

Points to Remember

Component-based cost containment is temporary.

The burden of health care cost falls mostly on labor.

Value-based purchasing requires leaping many barriers.

All sustainable strategies involve sacrifice. Each organization needs to find the tradeoff

that best matches its mission.

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Total Health Care Expense Growth

Cost Containment 1980 to the Present

Health care expenditures increased at double digit rates in the early and late eighties

Health care expenditures are again approaching double digit rates

Insurance premiums have featured double-digit growth for the past two years.

Each health care service component has had its turn at leading the rise in costs

Hospital Expenditure Growth

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Hospital Cost

14% or greater expenditure growth in 1980-82 DRGs led to stabilized expenditure growth. Movement to outpatient services, ambulatory surgery, and

clinics since the mid 1980s Early 1980s, 80% of all surgeries was inpatient hospital event

and 20% outpatient or ambulatory surgery center Now close to reversed Hospital costs share declined from 42% of total to 32%. Yet spending on hospital services accounted for over 50% of

health care expenditure growth in 2001. Hospitals continue to build.

Physician and Clinical Services Expenditures Growth

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Physician and Clinical Services Expenditure Growth

Double – digit $ growth throughout the 1980s 1984 Medicare fee freeze – defeated by volume

increases (especially for diagnostic services) 1992 – RBRVS – fee schedule and volume

performance standards have helped to keep category in line with overall medical expenditures

Physician and clinical service costs share has risen from 19% to 23%, mostly in the 1980s

Technology has moved out of the hospital.

Insurance and Administrative Cost Inflation

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Insurance and Administrative Cost

The insurance and administrative portion (load factor) of the premium has been most volatile cost component.

Insurance pricing cycle features market share chasing followed by bouts of profit margin expansion and reserve replenishment

Average growth above 20% for 1988-1990 led to movement for major health care policy reform

It failed but managed care (pricing) boomed.

Pharmaceutical Cost Inflation

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Pharmaceutical Cost

Double-digit growth since 1980 except for 1992-94 The most rapidly rising component of expenditures since

1995. Some argue increased Rx has been the key ingredient in

keeping total expenditures down. Mix of rising usage, new products & rising prices Public policy response varies; some states act as large

purchaser and/or price fixer (Maine). Three tiered programs drive private purchasing. Expenditure share has risen from 5% to 9.7%

Back to the Future

Who Bears the Burden?

Two Central Facts– Employer arranged health care plans are a cost of labor– Management is more responsive to changes in the cost of

labor than laborers are to changes in pay Consequence: Labor bears most of the burden even if

employers pay the bill– (80% - median estimate among economists)

Common Perception: businesses or consumers bear the burden

Labor Supply

Labor Demand

Total Compensation

Number of Laborers

After HC$ Increase

Wage or Salary

Incidence of Health Plan $ Increase

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Total real compensation Real wages and salaries Real Benefits

Real Wages Were Flat until 1996

Real Wages and Sales did not grow between 1980 and 1995

Total real compensation grew by 0.5% per year Real wages grew by 0.0% per year Real benefits grew by 1.6% per year For 2000, TC 1%;Ben 2.2%;Wages 0.5% Conclusion: Increases in productivity (1.5%)

consumed by health insurance and pension Conclusion: Laborers bear the burden of

health insurance cost even if employer pays

The Whack a Mole Response to Rising Health Care Costs

Short-sighted benefit redesign:– Target the fastest growing component (e.g., ER

use, RX use) Cost Accountant’s Revenge

– If policy slows the fastest growing component, a new fastest grower emerges

Only attempts to address total expenditures have the potential for sustainable success

Capital Expenditures Control

Duplication of services and reduction of excess capacity have often led to calls for controlled entry – Certificate of Need (CON) laws

Common practice –1970s & 80s, the results: barriers to new entrants and no changes in expenditure growth

Solutions are dictated by political power, not market success

CON insulates existing providers from attempts to increase quality or reduce cost

Which Costs Should Be Contained?

Those paid by third parties Total payments to the industry (including out-

of-pocket) Those related to diseases and their burdens Politicians, employers, and individuals have

different answers

Managed Care in the 1990s

1990s version featured insurance companies trading patient volume for provider network discounts or capitated payment

Most insurers focused on discounts and major utilization trends – “the low hanging fruit”

Employers selected 1 plan (an insurance carrier HMO) to reduce administrative cost

HMO plans offered comprehensive benefits

Managed Care and its Backlash

Comprehensive benefits with employer-chosen restricted access infuriated virtually everyone.

Low unemployment rates and income tax exemption encouraged expanded benefits and networks ; thus, less management & higher $

Further reductions in hospital length of stay not cost-effective but contentious

3 Potentially Sustainable Strategies

Make health care a consumer responsibility– Encourage patients to be efficient consumers

Cap payments to the health care sector– Nationalize insurance or employ global budgets

Encourage primary and secondary prevention– Disease management for chronic disease– Changes in life style for the rest of us

Ideally, seek to add value

Consumer Responsibility to the Rescue

A response to OPM (Other People’s Money) Increased cost sharing – it’s your money, you decide

how to spend it Benefit Shift: from comprehensive coverage with

restricted choice to partial subsidy for broad choice Medical Savings Accounts feature the extreme version

– only catastrophic insurance Many new (untested) options exist Consumer income and preferences drive choices

The Costs of Shifting the Burden

Some employers abandon health care Risk segmentation increases Reduced incentives to join comprehensive

benefit plans (HMOs) Incentives to postpone treatment and ignore

prevention are increased “Out of the managed care frying pan into the

cost sharing fire”

The Ultimate: Cheap Insurance

Single Payer Rises Again

Expenditures can be contained by politically set budgets or global caps

Canada and UK have successfully controlled the health care line item

Priorities in these systems set politically or by providers

The Costs of Single Payer

Individual preferences play limited role Burdens of illness not addressed, only gov’t budgets Technology limited: both that which adds value and

that which does not– Fewer MRIs means more surgery– Fewer new drugs means more intensive medicine

If enrollees can choose a capped plan (or not), individual preferences can served

Gov’t. systems run out of money before fiscal year ends

The Budget Cake is Only So Big

Chronic Disease Burdens are Huge

The burden of illness far exceeds documented paid claims

– Total burden approximates $10k per year per worker with only 47% from group health $ (Goetzel)

Chronic disease burdens cost > $1 trillion per year– CDC/RWJ report estimates that 125 million American suffer

from a chronic condition (Anderson)– Average annual medical cost of $6,032 for those with vs.

$1,105 for those without a chronic disease (Anderson)– Chronic disease a/c 67.5% of medical $ for working age adults – Ave. work impairment is ranges from 2.3 to 10.9 days per 30

day work period (Kessler)

Top 10 Diseases by Employer Expense

Chronic Disease Management

Use evidence-based medicine Well conceived disease management

programs yield $5 - $10 of benefit per $ spent Successful programs integrate care,

emphasize communication, and reduce barriers to compliance

Success requires compliance with evidence-based guidelines

Primary Prevention

The prevalence of chronic disease and the impact of risk increases with age

Pick prevention programs that match risks Wellness programs – Goetzel AJHP – medical

costs dropped for 28 /32 corporate programs reviewed

Reduced Risk Means Reduced Cost

Some Costs of Prevention

Payment comes before savings and, thus, may not make sense with annual enrollment switching

Each program has a different payback period Each population faces a different set of risks Compliance (medical community and

patient/consumers) does not happen without education and compatible incentives

Pay Me Now or Pay Me Later

Seek to Add Value

Determine services that add the most improvement in health status or consumer satisfaction per $ spent

Employ evidence-based medicine – that based on the most valid and reliable scientific information available

Reward evidence-based “best” practice Recognize there may not be one “best” way.

Value-Based Purchasing: No Mean Feat

No common definition of value or quality; hence hard to implement

Multiple reporting requirements and data validity mean extra expense to implement

Public sector purchasers face legislative and administrative restrictions on options

Purchasers must have market power Providers resist quality performance

comparisons

Join a Purchasing Coalition

Increased bargaining power if in same market Shared benefits and administrative

responsibility is essential for success Mixed results since each pool represents an

unique mix of risks, benefits, and incentives California HIPC aggressively negotiated prices

with plans; most others had very limited effect

Central Florida Health Care Coalition

1 million covered lives – 1/3 of the market Started in mid 1980s, spent millions Focus: good quality is cost-effective Identify evidence-based best practices

– Over-use, under-use, and inappropriate use– MBGH estimates at $1,350 per employee per year +

$350 indirect costs for poor quality care– Estimate: 30% of direct hc $ related to poor quality

Pay for Performance

Central Florida Coalition spent $1 million – 5 year implementation plan

Measure and communicate best practices– Establish platinum, gold, and silver payment

50% based on clinical quality 25% based on cost 25% based on patient satisfaction

– Silver level: pay 65% of Medicare Also reward platinum consumers

– Make consumers aware of cost– Reward compliance and risk reduction

Trade-offs to be faced–all options

Increased life expectancy means increased cost but increased healthy years

– Success in acute care increases life expectancy.– Chronic disease increases with age, and, thus, life expectancy.

Demographic factors suggest that health burdens will rise dramatically in the future; thus need to determine

– Which services to provide– Who will pay the bill

Health care resources are scarce; thus, priority setting, not new entitlements, is needed

Fundamental Choice for Purchasers

Patients / customers must choose either broad choice or increased integration– A broad network of providers

with high cost or external rationing fragmented care

– A narrow network of integrated providers with lower costs and internal rationing more care coordination

IBM helps its enrollees evaluate tradeoffs in terms of their own preferences

The Big Tradeoff

Fundamental Choice for Medical Community

Physicians must choose between– Independent practice with

Oversight from third parties Some ability to bill for extra services Limited financial risk Continuous need to market services

– Group practice with Assumption of financial risk Some clinical independence Group practice decision-making and oversight Opportunity for cost-effective integrated programs

Guidelines for Purchaser Choice of a Cost Containment Strategy

Focus on the total burden of illness, not component cost control

Develop and nurture long term partnerships among patients, providers, and payers. (Structure the system for all to win)

Identify health risk factors and choose health programs and benefit designs to reduce them

Guidelines continued

Invest in the information (including evidence-based guidelines) and communication infrastructure for prevention

Provide incentives for enrollees, providers, and payers to reward performance consistent with reduced risks and illness burdens

Success requires strong leaders who seek value from health services & human capital.

Editorial views

“…So far, health care has no Toyota…” –Molly Coye

JD Kleine – Oxymoron: The Myth of a U.S. Health Care System

“Knowing is not enough; we must apply. Willing is not enough; we must do” - Goethe

American Values

“You can always count on Americans to do the right thing - after they’ve tried everything else.” – W. Churchill

“When faced with second-best trade-off between cost-conscious choice and no choice at all, however, Americans may grumble but select the former.” – J. Robinson

One Solution: Value + Choice

Find value and support it. Fixed contribution by employers to a flexible

spending account (Enthoven) Provide two options for coverage

– A focused narrow network that encourages prevention and chronic disease management

– Broad choice with consumers determining how to spend their money