Health Care Cost Drivers

1. Health Care Cost Drivers How the Affordable Care Act Re-Aligns Incentives Hot Issues in Health Care Legislative Conference November 11-12, 2010 Garden of the Gods Club Colorado Springs, CO

2. Outline of presentation • Current health care expenditures and trends • Drivers of health care expenditures • Revenues and expenditures of the Affordable Care Act • Delivery and payment reforms to re-align provider incentives

3. Current spending on health care in the United States - 2009 • $2.5 trillion • Private funds: $1.3 trillion • Federal funds: $918 billion • State and local funds: $285 billion • 17.3% of gross domestic product (GDP)

4. Health care expenditures relative to GDP SOURCE: Centers for Medicare and Medicaid Services

5. Trends in Colorado’s employer-based market: Employee coverage premium increases over time SOURCE: Medical Expenditure Panel Survey, 2010

6. Why have health care costs in the U.S. increased over the past 40 years? • Wealthy countries can afford expensive health technologies • The population is aging and disease prevalence has increased • Increases in level of insurance (1960 – 1990) • Inefficiencies in medical care delivery • Financial incentives to provide more services SOURCE: Health Care Costs: Key Information on Health Care Costs and their Impact, Kaiser Family Foundation, 2009

7. Health behaviors are drivers of annual health care costs • Tobacco - $168 billion • Obesity - $144 billion • Alcohol - $96 billion

8. Concentration of expenditures within the population SOURCE Kaiser Family Foundation, 2010 NOTE: Based on 2007 data. Estimates include civilian, non-institutionalized population

9. Average per-capita spending by age group SOURCE: Kaiser Family Foundation, 2010 NOTE: Estimates include civilian, non-institutionalized population Based on 2007 data

10. The Affordable Care Act: How do the numbers stack up? According to the Congressional Budget Office’s analysis of federal health reform, between 2010 and 2019: • Federal gross costs will increase by $938billion • Federal revenues and savings will be $1.06 trillion • The federal deficit will be reduced by $122 billion SOURCE: Congressional Budget Office and Commonwealth Fund

11. How will the federal government reduce expenditures over the next 10 years? • Reductions to Medicare Advantage plans • Reductions to Medicare providers • Productivity improvement/provider payment updates (such as skilled nursing facilities and hospitals) • Home health payment adjustments • Reducing hospital re-admissions • Reduction to Disproportionate Share Hospitals • Payment innovations in Medicare and Medicaid

12. The Independent Payment Advisory Board • 15-member Board, appointed by President and confirmed by Senate • Will recommend ways to reduce Medicare spending if growth of per capita expenditures exceed targets • Executive branch must enact recommendations unless Congress enacts alternatives to achieve same level of savings

13. How will the federal government increase revenue? • Establishing 40% tax on “Cadillac” plans (plans that cost $10,200 or more for individuals and $27,500 for families) • Increasing Medicare payroll taxes on higher-income taxpayers • Additional tax on investment income for high-income earners • Individual and large employer penalties for not providing coverage

14. Why the controversy about the CBO’s analysis? • CBO estimates expenditures and revenues based on “the letter of the law” • Will Congress have political will to implement cuts to Medicare? • No fix to Medicare payments to physicians (SGR) • Does not include estimates for “discretionary” spending

15. Delivery and payment reforms Programs and pilots within the Medicare and Medicaid programs to incent providers to reduce cost while maintaining or improving quality: • Medical homes • Accountable care organizations • Bundled payments

16. Initiative #1: Medical homes • Team that provides and coordinates health care services for individuals • Primary care clinician serves as team manager • Services are coordinated among all providers • Team utilizes health IT and analytical tools • After hours telephone access to team staff • Financial incentives reward providers that support medical home

17. Initiative #2: Accountable care organizations • A network of providers responsible for managing and providing health care to individuals enrolled • ACO will receive a fixed payment providing care to enrollees • Performance monitoring will take place to ensure quality of care does not decline • ACO that achieves savings while maintaining quality is eligible to share in the savings with the federal government

18. Initiative #3: Bundled payments • A single payment for all health care services related to a specific course of treatment or condition over a period of time (i.e. heart bypass surgery) • Providers are not reimbursed for each discrete service • Mitigates financial incentive to duplicate or provide unnecessary services

19. Changes in health expenditures: can we bend the cost curve? SOURCES: Centers for Medicare and Medicaid Services, Office of the Actuary, Commonwealth Fund

20. Growth of annual health care expenditures: before and after the Affordable Care Act SOURCE: Centers for Medicare and Medicaid Services, Office of the Actuary

21. Questions? Amy Downs Director for Policy and Research downsa@coloradohealthinstitute.org 303.831.47200 x221