Reducing Health Costs: What’s Working and What’s Not

Reducing healthcare costs is widely accepted as a system imperative: the facts are compelling:

  • National health spending is projected to grow at an average rate of 5.5% per year for 2017-26 and to reach $5.7 trillion by 2026.  While this projected average annual growth rate is more modest than that of 7.3% observed over the longer-term history prior to the recession (1990-2007), it is more rapid than has been experienced 2008-16 (4.2%).  Health spending is projected to grow 1.0 percentage point faster than Gross Domestic Product (GDP) per year over the 2017-26 period; as a result, the health share of GDP is expected to rise from 17.9% in 2016 to 19.7% by 2026. National Health Expenditure Projections 2017-2026 www.cms.gov
  • Premiums for employer-sponsored health insurance in the U.S. have increased from an average of $6,498 in 2005 to $11,320 in 2016. Likewise, employee contributions, including premiums and out-of-pocket costs, have doubled, increasing from $2,141 in 2005 to $4,978 in 2016—increases that surpass those of U.S. salaries. 20% of health care consumers cite high health care costs as the major reason they have either declined health care coverage, stopped taking medications, or avoided care altogether. AON
  • Health spending per person in the U.S. was $10,348 in 2016 –  31% higher than Switzerland, the next highest per capita spender and 100% higher than the average per capita spending ($5169) for the 10 richest countries. How does health spending in the U.S. compare to other countries? Peterson-Kaiser Health System Tracker February 13, 2018

Though health costs are viewed as problematic, opinions are mixed about how they should be addressed. Some see a silver lining: they posit that the healthcare industry, which employs 19 million, is a job creator necessarily linked to the aging of our population and our burgeoning chronic care needs.

Some think our health costs are actually on par with other industrialized nations when social services expenditures are added: per RAND, we spend 16% of our GDP on social services programs for our disadvantaged vs. 22% in other developed countries.  The costs associated with our addictions, gun violence, suicide, poverty and others are captured in our hospitals, clinics and public health programs. But that doesn’t explain why our costs don’t result in the world’s best outcomes: even after adjusting for social risk factors, we’re #1 in the world for costs but #11 for outcomes.

And most think health costs are unnecessarily high and need attention. But there’s wide disagreement about which mechanisms are best suited to reduce them equitably and effectively.

In the past few months, a number of reputable organizations have offered glimpses of what’s working and what’s not:

  • Comparisons of U.S. Underlying Costs to other Countries: The U.S. has higher prices for most health care services and prescription drugs, according to available internationally comparable data. Meanwhile, utilization of several services, including physician consultations and hospital stays, is lower than in many comparable countries. Use of some services, such as C-sections and knee replacements, is higher in the U.S. than in similar countries. Despite having fewer office visits and shorter average hospital stays, the U.S. overall spends twice as much per person on healthcare than do comparable countries. How do healthcare prices and use in the U.S. compare to other countries? Rabah Kamal and Cynthia Cox   Kaiser Family Foundation May 8, 2018
  • Costs and Market Competition: A team of researchers from HFMA, Leavitt Partners and McManis Consulting compared factors that influenced total costs of care at the community level from 2012-2014. They found “the penetration of population-based value-based payment (VBP) models is not yet having an impact on curbing growth in total cost of care. Lower cost markets appear to benefit from competition among health systems with well-organized provider networks and geographic coverage… and transparent sharing of information on provider quality and costs” What is Driving Total Cost of Care? An Analysis of Factors Influencing Total Cost of Care in U.S. Markets May 2018 hfma.org/tcoc
  • Accountable Care Organizations: An Avalere research team found that the Medicare Shared Savings Program (MSSP) performed “considerably below” Congressional Budget Office (CBO) forecasts made in 2010 when the MSSP was enacted as part of the Affordable Care Act. The popular program, which has grown to 561 participants, actually resulted in increased spending $384 million vs. $1.7 savings. Medicare Accountable Care Organizations Have Increased Federal Spending Contrary to Predictions they Would Produce Net Savings Avalere.com/Insights March 19, 2018
  • Social Determinants: A Kaiser Permanente research team studied the impact of social determinants of health (SDOH i.e. factors such as socioeconomic status, race, educational attainment, neighborhood and environment, public safety, food security, and other elements of everyday living) in 5 states over a 10-year period. They found programs targeted to lower income and disadvantaged school age kids populations (school lunches, food insecurity, et al) correlated to lower community health costs. The Kaiser Permanente Community Health Initiative: A Decade of Implementing and Evaluating Community Change Pamela M. Schwartz, MPH,1 Cheryl Kelly, PhD, MPH,2 Allen Cheadle, PhD,3 Amy Pulver, MA, MBA,4 Loel Solomon, PhD1Schwartz et al / Am J Prev Med 2018;54(5S2): S105–S109

What’s worked? There’s growing consensus among health services researchers that systematically lowering our costs involves lower prices for drugs, physicians services and hospital care; stronger emphasis on preventive and primary care and investment in social services for those disadvantaged. But getting from here to there is tricky: investing more in these areas means spending less in others unless everyone’s OK with paying more. That’s been our mode of operating for 45 years.

Like every industry, healthcare has its winners and losers. It’s a tough business: it’s capital dependent, labor intensive, technologically differentiated and largely comprised on private operators big and small. Winning is about operating within a system of rules and incentives to deliver value to customers and return on capital to owners. But unlike no other industry, healthcare deals with the complexity of medical science, the vulnerability of human suffering, the reality that everyone’s a user and a structure in which the customers (patients) are not the primary decision maker or buyer.

The current strategy to reduce health costs set forth by regulators who oversee our system seems quite clear:

  • Drive key decisions about the Medicaid and health insurance programs to states: they’re closer to the action.
  • Drive drug prices down by creating more generic competition for expensive brands and expose drug company greed where it’s obvious (aka ‘name and shame’).
  • Drive price transparency in every nook and corner of healthcare so consumers can compare for themselves.
  • Drive accountability for costs and outcomes to integrated provider organizations of physicians and hospitals by expanding alternative payment programs that work (and discontinuing those that haven’t).
  • Drive changes in the Medicare program that address root causes of senior health costs—loneliness, financial insecurity and access to primary and long-term care services virtually and physically.
  • Drive innovations in employer-sponsored health benefits plans that allow through elimination of mandates, protections of ERISA, relief from burdensome regulations and promotion of employee responsibility vis a vis HSAs.
  • Drive government spending for Medicare and Medicaid down through budgetary and administrative actions where possible.

Are these enough to drive down costs? One has to be impressed that leaders in HHS and CMS have made good on efforts to reduce regulations and reporting requirements seen by many as costly and burdensome. But the realities are these:

  • Efficiency gains in parts of the system are offset by price increases in others. The net result has been annual costs increases above inflation and overall economic growth.
  • Volume-to-value programs have had mixed results and their cost-reductions are slow to be realized.
  • The financial motivations to protect the status quo are stronger than the motivations to change.

So, what’s next?

In March 1967, Abba Eban, an Israeli politician observed “You can always count on Americans to do the right thing - after they've tried everything else” (though widely assumed, there’s no record this statement was made by Winston Churchill). Does this sentiment apply to the issue of our health costs? It would seem so. We’ve tried everything.

My take:

Until reducing health costs involves price controls in some form and unless policymakers allocate more resources to social services that effectively equip disadvantaged populations to live healthier lives, it’s unlikely current efforts will slow our health costs.

There’s plenty of money in the U.S. system: how and where we spend it is the issue. If reducing health costs is an imperative, spending our healthcare dollars more wisely would seem a logical first step.

Paul