Whack a Mole and Other Approaches to Health Care Cost Containment

1. Whack a Mole and Other Approaches to Health Care Cost Containment Merton D. Finkler, Ph.D Lawrence University

2. 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

3. Whack a Mole Game

4. 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.

5. Total Health Care Expense Growth

6. 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

7. Hospital Expenditure Growth

8. 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.

9. Physician and Clinical Services Expenditures Growth

10. 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.

11. Insurance and Administrative Cost Inflation

12. 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.

13. Pharmaceutical Cost Inflation

14. 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%

15. Back to the Future

16. 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

17. Incidence of Health Plan $ Increase

18. Real Wages Were Flat until 1996

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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”

28. The Ultimate: Cheap Insurance

29. 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

30. 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

31. The Budget Cake is Only So Big

32. 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)

33. Top 10 Diseases by Employer Expense

34. 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

35. 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

36. Reduced Risk Means Reduced Cost

37. 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

38. Pay Me Now or Pay Me Later

39. 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.

40. 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

41. 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

42. 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

43. 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

44. 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

45. 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

46. The Big Tradeoff

47. 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

48. 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

49. 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.

50. 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