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Cost Containment and the Patient Protection and Affordable Care Act. Innovation, Business & Law Colloquium: Health Care Reform Act David Orentlicher, MD, JD Visiting Professor of Law University of Iowa College of Law September 23, 2010. On one hand.

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Cost Containment and the Patient Protection and Affordable Care Act


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  1. Cost Containment and the Patient Protection and Affordable Care Act Innovation, Business & Law Colloquium: Health Care Reform Act David Orentlicher, MD, JD Visiting Professor of Law University of Iowa College of Law September 23, 2010

  2. On one hand • The legislation “puts into place virtually every cost-control reform proposed by physicians, economists, and health policy experts.” • Orszag & Emanuel (2010)

  3. On the other hand • "The job of figuring how to cover uninsured people used up all the political oxygen that was available. They didn't have the energy for costs." • Alan Sager, quoted by McClatchy-Tribune News Service, April 1, 2010

  4. Cost containment • Outline of today’s class • The cost problem • Is PPACA the solution? • If not, how else might we contain costs? • What constraints does the law place on cost containment strategies?

  5. Cost containment • Outline of today’s class • The cost problem • Is PPACA the solution? • If not, how else might we contain costs? • What constraints does the law place on cost containment strategies?

  6. The highest spending country • Health care spending in economically-advanced democracies US $7,290/capita 16% of GDP Switzerland 61% of US 67% of US Canada 53% of US 63% of US Germany 49% of US 65% of US Japan 35% of US 51% of US New Zealand 34% of US 57% of US • OECD Health Data 2009 (2007 data except 2006 for Japan)

  7. Total expenditure on health per capita (US$ PPP) OECD, 2006

  8. Total expenditure as % GDP OECD, 2006

  9. The cost problem What do we get for our money?

  10. Inadequate return on our health care $ • US health system is less efficient than systems in: • Spain, France, Germany, Austria, Italy • UK, Denmark, Norway • Japan, China, Australia • Canada, Mexico, Colombia, Venezuela • Evans, et al. 2001 • US patients treated in higher-cost communities have similar outcomes to US patients in lower-cost communities • Gawande 2009

  11. Infant mortality per 1,000 births OECD, 2006

  12. Total preventable years of life lost per 100,000 pop. OECD, 2006

  13. Quality of care • Breast cancer, 5-year survival rate • US-90.5%, Canada-87.1%, Japan-86.1%, France-82.8%, UK -77.9% • Colon cancer, 5-year survival rate • Japan-67.3%, US-65.5%, Canada-60.7%, France-57.1%, UK-50.7% • Asthma hospitalization rate (per 100,000 pop.) • US-120, UK-75, Japan-58, France-43, Canada-18 • Diabetes hospitalization rate (per 100,000 pop.) • US-57, UK-32, Canada-23, Germany-14, Italy-11

  14. Inadequate return on our health care $ Not because we’re less healthy

  15. % of pop. daily tobacco smokers OECD, 2006

  16. Alcohol consumption (liters per capita) OECD, 2006

  17. % of pop. 65 years or older OECD, 2006

  18. % of pop. 19 years or younger OECD, 2006

  19. Obesity rates

  20. Overall effect of health status • Americans overall are less healthy, but this is only a small part of our higher health care costs • McKinsey & Company study found that “disease burden” adds $25 billion in health care costs for treatment of disease (out of $2.5 trillion in health care spending)

  21. Why are costs higher in the US?

  22. Higher prices in US • Costs are higher in US in large part because prices for health care services are higher • Single-payer systems can bargain more effectively with doctors, hospitals and pharmaceutical companies • Can also have enforceable spending targets via “all-payer regulation” (Oberlander and White 2009) • Higher ratio of specialists to primary care physicians in US • Probably reflects high ratio of specialist pay to primary care pay (Vladeck 2010) • High costs of medical education also may be important (Peterson and Burton 2007)

  23. Greater use of surgical procedures and expensive diagnostic tests • More procedures to treat blocked coronary arteries (twice OECD avg.), more knee replacements (50% above OCED avg.), and more cesarean sections (25% above OECD avg.) • Increase in outpatient surgery centers very important • More MRI exams (more than twice OECD avg.) and more CT exams (more than twice OECD avg.) • OECD Health Data 2009 and Peterson and Burton 2007

  24. Structural contributors to high costs • Insurance => Price-insensitive consumers • If treatment costs $100 and yields a “value” of $75, it shouldn’t be provided—but if the patient only pays $25 and receives the $75 value, it will be worth it to the patient • Americans pay more total dollars out of pocket, but we generally pay a smaller percentage of our health care costs out of pocket (i.e., through deductibles and co-payments) (premium payments are not included) • France-8%, US-13%, Germany-13%, Canada-15%, Japan-17%, Switzerland-32% (Peterson and Burton 2007)

  25. Structural contributors to high costs • Fee-for-service reimbursement => Quality-insensitive physicians and hospitals • When physicians and hospitals are paid more to do more, regardless of outcome, they’ll do more • Especially when they lose money on higher quality care (Urbina 2006) • Example of clinic that switched from salary to commission on fees generated and doctors scheduled more appointments and ordered more blood tests and x-rays (Hemenway 1990)

  26. Cost containment • Outline of today’s class • The cost problem • Is PPACA the solution? • If not, how else might we contain costs? • What constraints does the law place on cost containment strategies?

  27. PPACA and cost control Many different provisions designed to contain costs Serious question whether they really address the cost problem—PPACA doesn’t take on the major drivers of higher costs other than to some extent through demonstration projects

  28. Permanent reductions in Medicare reimbursement rates (§ 3401) • Applies to hospitals, nursing homes and other facilities • Every year, payment rates are adjusted to reflect increases in the operating costs of health care facilities • The increases have been calculated from a “market basket” of goods and services that the facilities purchase (with reductions for failure to file quality data and other “technical” adjustments) • Under PPACA, a productivity adjustment will be made based on economy-wide productivity gains (which are greater than in health care)—there also will be a ten-year further reduction in the update percentage (0.10 to 0.75 percent per year) • Estimated savings = $196 billion

  29. Permanent reductions in Medicare reimbursement rates (§ 3401) Note that PPACA provisions reflect a mix of policy and politics—see the annual reductions in update percentages: 2010 0.25% 2015 0.20% 2011 0.25% 2016 0.20% 2012 0.10% 2017 0.75% 2013 0.10% 2018 0.75% 2014 0.30% 2019 0.75% After 2019, IMAB recommendations due to kick in

  30. Reduction in payment rates forMedicare Advantage program (§ 3201) Medicare Advantage is an option for Medicare recipients to enroll in a private health care plan rather than choosing traditional, fee-for-service Medicare (Part C of Medicare) While the idea was to provide a more-efficient, lower-cost option, Medicare Advantage plans have turned out to be more expensive (up to 150% of traditional Medicare) The low-hanging fruit of cost savings Estimated savings = $135 billion

  31. Part B Medicare premium calculation for high-income recipients (§ 3402) Part B of Medicare covers physician fees, laboratory fees and other outpatient services Most Medicare recipients pay 25 percent of the Part B premium; currently, higher income recipients pay between 35 and 80 percent of the Part B premium. PPACA freezes the income thresholds for higher-income premiums at 2010 levels for ten years before resuming annual adjustments for inflation. Estimated savings = $25 billion

  32. Reduction in disproportionate share hospital (DSH) payments (§ 3133 ) DSH payments are made to hospitals that treat a disproportionate share of low-income patients Originally introduced to compensate hospitals for higher costs of treating low-income patients; now justified as a way to maintain access to care for low-income patients Estimated savings = $22 billion

  33. Independent Medicare Advisory Board (IMAB) (§ 3403) • IMAB will develop proposals to keep Medicare spending within statutory targets, and proposals will automatically take effect unless Congress adopts substitute provisions • Proposals may not ration health care, raise costs to recipients, restrict benefits or modify eligibility criteria • IMAB also will provide Congress with recommendations for slowing the growth of health care spending in the private sector. • Estimated savings = $16 billion by 2020, more substantial after that (assuming it works)

  34. Independent Medicare Advisory Board (IMAB) (§ 3403) • Concerns about IMAB • Will IMAB focus on short-term fixes rather than long-term changes that really can “bend the cost curve?” • Will Congress bypass the IMAB process and authorize increases in funding through independent legislation? • Are the limitations on the kinds of proposals that IMAB can develop too restrictive? • Will cuts in reimbursement reduce patient access to physicians?

  35. Patient-Centered OutcomesResearch Institute (§ 6301) • Created to promote comparative-effectiveness research (CER) • Research that evaluates and compares the patient health outcomes and benefits of two or more medical treatments or services • Responsibilities include • Setting priorities for CER and funding CER studies • Analyzing data from CER studies and reporting to the public on the significance of the study results

  36. Patient-Centered OutcomesResearch Institute (§ 6301) • The Institute may not recommend coverage changes or other policies based on its analyses, but • Medicare and Medicaid may consider the Institute’s analyses in determining coverage policies as long as: • No denial of coverage “solely on the basis of” CER • Coverage decisions do not treat the lives of elderly, disabled or terminally ill individuals as having lower value

  37. Can the CER institute become our NICE? • NICE evaluates the cost-effectiveness of medical therapies and approves those that are sufficiently cost-effective for Britain’s National Health Service • Treatments are cost-effective if they provide 1 QALY for no more than £20,000 (now $31,250) • Sometime, NICE approves treatments up to £30,000 ($46,900) per QALY • Rarely, NICE approves treatments beyond £30,000 per QALY • NICE has approval authority, while the CER institute can only issue reports

  38. What’s a “good” buy? “Expensive” more than $100,000/QALY “Reasonable” $50,000/QALY (UK upper limit ~ $47,000) “Very Efficient” less than $25,000/QALY Most writers use $50-100,000 as upper limit of good value, but public preferences suggest upper limit over $200,000. Hirth RA, et al., Medical Decision Making. 2000;20:332-342

  39. Some sample QALYs (2002 dollars)Harvard Public Health Review (Fall 2004) • < $0 (If the cost per QALY is less than zero, the intervention actually saves money)Flu vaccine for the elderly • Under $10,000Beta-blocker drugs post-heart attack in high-risk patients • $10,000 to $20,000Combination antiretroviral therapy for certain patients infected with the AIDS virus • $15,000 to $20,000 Colonoscopy every five to 10 years for women age 50 and up • $20,000 to $50,000Antihypertensive medications in adults age 35-64 with high blood pressure but no coronary heart disease Lung transplant in UK (Anyanwu AC et al.J ThoracCardiovascSurg2002;123:411-420) • $50,000-$100,000Dialysis for patients with end-stage kidney disease Antibiotic prophylaxis during dental procedures for persons at moderate to high risk of bacterial endocarditis ($88,000) (Med Decis Making. 2005;25(3):308-20) • Over $500,000CT and MRI scans for kids with headache and an intermediate risk of brain tumor

  40. Condition/Treatment Cost per QALY Treatment for Erectile Dysfunction $6,400/QALY *Physician Counseling for Smoking $7,200/QALY Total Hip Replacement $9,900/QALY *Outreach for Flu and Pneumonia $13,000/QALY Treatment of Major Depression $20,000/QALY Gastric Bypass Surgery $20,000/QALY Treatment for Osteoporosis $38,000/QALY *Screening For Colon Cancer $40,000/QALY Implantable Cardioverter Defibrillator $75,000/QALY Lung-Volume Reduction Surgery $98,000/QALY Tight Control of Diabetes $154,000/QALY *Treating Elevated Cholesterol ( + 1 risk factor) $200,000/QALY Resuscitation After Cardiac Arrest $270,000/QALY Left Ventricular Assist Device $900,000/QALY COST/QALY: Selected Medicare services

  41. Cost of treatment for metastatic colon cancer(Schrag D. NEJM. 2004;351:317-319)

  42. Examining the cost and cost-effectiveness of adding bevacizumab (Avastin) to chemo in metastatic colon cancer • Randomized trial compared chemotherapy alone vs. chemotherapy + bevacizumab • Bevacizumab regimen prolonged median survival from 15.6 to 20.3 months (p<0.001) • Cost of extra 4.7 months? • $101,500 (assuming $5,000 per month for bevacizumab) • $259,149 per year of life gained (not quality adjusted) • NICE decided not to recommend for NHS coverage

  43. Examining the cost and cost-effectiveness of adding bevacizumab (Avastin) to chemo in advanced non-small cell lung cancer • Randomized trial compared chemotherapy alone vs. chemotherapy + bevacizumab • Bevacizumab regimen prolonged median survival from 10.2 to 12.5 months (p=0.007) • Cost of extra 2.3 months? • $66,270-$80,343 • $345,762 per year of life gained (assuming $66,270 cost) • Grusenmeyer PA, Gralla RJ. J. Clin. Oncology. 2006;24(18S):6057.

  44. Can the CER institute become our NICE? • Cost-effectiveness decisions are controversial • Prohibited under PPACA from being used as sole basis for denying coverage in federal programs (§6301) • Oregon Health Care Plan • Ended up with fairly generous “basic” coverage • Mammography screening guidelines in 2009 (even though cost wasn’t a factor) • US Preventive Services Task Force recommended that routine screening begin at age 50 instead of age 40 • The “tragic choices” problem (Orentlicher 2010) • It’s difficult to make life-and-death decisions openly

  45. PPACA demonstration projects • Bundled payments for hospital care and for the month following discharge (capitation lite) (§2704 and §3023) • Capitation payments instead of fee-for-service reimbursement (§2705) • Incentives for doctors and hospitals to form accountable care organizations (financial rewards for higher quality and/or lower cost care) (§2706 and §3022) • Will integrated systems exploit market power to maintain revenues rather than to introduce efficiencies and reduce costs?

  46. Quality-adjusted payments under PPACA Incentive payments to hospitals that meet specified performance standards (§3001) Adjustments to physician reimbursement based on quality and cost of care provided (§3001) Expansion of reports to physicians that indicate how their use of resources in patient care compares to use by other physicians (§3003) Lower payments to hospitals with high numbers of patients who become sicker because of their hospital care (§3008) Lower payments to hospitals that have excessive numbers of patients readmitted to the hospital after discharge (§3025)

  47. Quality-adjusted payments • Pay for performance so far has a mixed track record • It’s difficult to assess quality of care—did a patient do well because of or despite the doctor’s intervention? • Often, process-based measures are used, but those need continual updating • Impact has been modest to date

  48. Tax on high-cost health plans (§9001) Starts in 2018 Imposes a 40 percent tax to the extent that the value of coverage exceeds a threshold amount The threshold starts at $10,200 for individuals and $27,500 for families (which is about double the average cost for health care coverage) The threshold amount is adjusted upward for health care cost inflation and higher costs of the individual’s risk pool Estimated revenues = $32 billion in 2018 and 2019

  49. Concerns about the “Cadillac” tax • High costs of high-cost health plans may reflect health status of the workforce and health care costs of the community rather than the richness of the benefits • Gabel, et al. 2010 • Reducing tax subsidies for health care insurance may have a regressive effect (i.e., the higher taxes may represent a higher percentage of income for lower-income persons) • Himmelstein & Woolhandler 2009; Gabel, et al. 2010