2/12/15%

Health%Finance:%The%Cost%of%Care%
Lecture%5%
February%12,%2015%

Learning%Objec@ves%
!%%
How%much%do%we%spend%on%health%care%
What%do%we%spend%the%money%on%
Why%are%health%care%costs%increasing%
Geographic%varia@on%in%spending%
How%can%we%hold%down%costs%
%

1%

2/12/15%

Key%Deni@ons%
Revenue:%sources%of%money%
Expenditures:%what%is%spent%on%a%product%
or%service,%or%employee%(price%@mes%
quan@ty)%
Costs:!what%is%spent%on%a%unit%of%service%
(pa@ent%visit,%day%in%the%hospital)%
Charges:!what%is%actually%billed%to%a%payer%
(3rd%party%or%consumer,%or%both)%
Reimbursement:%What%payers%actually%
pay%
Gross!domes8c!product:!sum%of%all%goods%and%
services%produced%in%a%given%period%(size%of%the%
economy)%
3

Na@onal%health%spending%reached%%
$2.8%trillion%in%2012%

4%

2%

2/12/15%

Health%Spending%%Share%of%GDP%

Health%spending%per%capita%%
increased%57%%between%2002%and%2012%

6%

3%

2/12/15%

Major%Programs%as%a%Share%of%the%Federal%
Budget%(1962^2012)%

7%

Health%Care%SpendingInterna@onal%Comparisons%in%%
the%OECD%countries,%19802009%
Health spending as a percent of the
Gross Domestic Product

Average spending on health

per capita ($US PPP*)
18

8,000
United States
Canada
Germany
France
Australia
United Kingdom

7,000
6,000

16
14
12

5,000

10
4,000

2008

2006

2004

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

0
1988

0
1986

1984

1,000

1982

1980

2,000

2002

United States
France
Germany
Canada
United Kingdom
Australia

2000

3,000

* PPP=Purchasing Power Parity.

Data: OECD Health Data 2011 (database), Version 6/2011.8accessed 09/01/2012

4%

2/12/15%

On%whom%do%we%spend%our%health%care%
dollars%?%
Elderly%
5%%of%the%popula@on%
accounts%for%nearly%50%%of%
all%health%care%expenditures%
30%%of%all%Medicare%and%
Medicaid%dollars%are%
devoted%to%individuals%in%
their%last%year%of%life%
18%%of%all%your%personal%
health%costs%are%spent%in%
your%last%year%
9

Who%u@lizes%the%resources?%

Chronic%Disease%Accounts%for%two^thirds%of%the%costs%
10

5%

2/12/15%

Where%do%health%care%dollars%come%from?%

11

12%

6%

2/12/15%

7%

2/12/15%

Cost%Drivers,%Systems%

General%Increase%Ina@on%
Popula@on%changes%(more%people%
and%more%elderly%people)%%
Prices%have%increased%(medical%cost%
ina@on)%
Provider%incen@ves%to%over%use%
(procedure%based%care)%
Increasing%complexity%in%
administering%a%mul@^payer%system%
Fraud%and%Abuse%
Malprac@ce%
Emphasis%on%cura@ve%not%preven@on%
Technology%%

15

Technology%is%main%reason%that%health%care%costs%
have%increased%
%(1960^2007)%%

Source:%Smith%S,%Newhouse%JP,%Freeland,%MS.%Income,%insurance,%and%technology:%why%does%health%spending%outpace%
economic%growth?%Health%Aairs%2009;28(5):1276^1284.%

16%

8%

2/12/15%

How%has%the%government%dealt%with%rising%
costs%in%the%past?%
1982:%Medicare%prospec@ve%payment%system%for%hospitals%
Essen@ally%a%budget%for%hospitals%based%on%the%diagnosis%of%
each%pa@ent%
1992:%Medicare%prospec@ve%payment%system%for%physicians%
Analogous%system%for%physician%services%
1980s%and%1990s:%promo@on%of%HMOs,%which%reduced%costs%
for%consumers%by%aggressively%nego@a@ng%with%providers%for%
low%prices%
2010:%Aordable%Care%Act%(ACA)%debate%over%whether%it%will%
eec@vely%address%health%care%costs.%
17%

Is%U.S.%health%care%spending%worth%it?%
Recall,%the%U.S.%spends%more%than%any%other%
developed%country%on%health%care%
Yet%it%ranks%among%the%lowest%on%major%health%
indicators%such%as%life%expectancy%at%birth%and%
infant%mortality%
But%the%U.S.%also%leads%the%world%in%health%care%
technology,%yielding%the%most%culng^edge%care%
for%the%insured%%but%this%care%is%very%expensive!%
Is%such%expensive%care%worth%it?%
18%

9%

2/12/15%

Implica@ons%of%Spending%
Aordability%for%government%
Aordability%for%employers%
Aordability%for%individuals%
Health%implica@ons%for%individuals%

19%

Government%aordability:%at%current%growth%
rates,%health%care%spending%will%exceed%revenue%

Source:%Government%Accountability%Oce%2009%

20%

10%

2/12/15%

Employer%aordability:%Employer%Sponsored%
Insurance%oer%rate%dropped%steadily%over%the%last%
decade%un@l%2010%
Percentage!of!All!Firms!Oering!Health!Benets,!2000G2010!

21%

Source:%Kaiser%Family%Founda@on%2010%

Individual%aordability:%the%growth%rate%of%insurance%
premiums%has%exceeded%that%of%workers %earnings%for%
many%years%
Cumula@ve%changes%in%insurance%premiums,%worker%earnings %earnings,%and%CPI,%
2000^09%(2008^09%projec@ons)%
120%%
100%%
80%%

Insurance%premiums%
60%%

Workers'%earnings%
Consumer%Price%Index%

40%%
20%%
0%%
2000% 2001% 2002% 2003% 2004% 2005% 2006% 2007% 2008*%2009*%
Source:%Commonwealth%Fund%2010%

22%

11%

2/12/15%

Challenges%
Targe@ng%ineec@ve%or%harmful%treatment%
Degree%of%uncertainty%regarding%the%clinical%
eec@veness%of%a%procedure%
Guidelines%and%payment%incen@ves%to%
persuade%doctors%to%change%their%treatment%
methods%
Compara@ve%eec@veness%studies%
23%

Why%might%it%be%dicult%to%reduce%health%
care%costs?%
Rule%of%health%care%spending:%
%
EVERY%DOLLAR%OF%HEALTH%CARE%SPENDING%=%A%
DOLLAR%OF%HEALTH%CARE%INCOME%FOR%
SOMEBODY%ELSE%

24%

12%

2/12/15%

Discussion%Topic:%Cost%of%Care%
The%cost%of%care%promises%to%be%a%signicant%problem%
in%the%future.%In%your%groups,%develop%some%ideas%for%
how%each%of%the%following%groups%or%organiza@ons%
can%help%reduce%the%cost%of%health%care%in%the%United%
States.%Consider%this%weeks%readings%in%your%
discussions.%
Consumers%(users%of%care)%%
The%government%(payers%of%care,%i.e.%Medicaid%and%
Medicare)%%
Providers%(doctors%and%hospitals)%%%
Businesses%(large%and%small)%%%

Geographic%Varia@on%in%Costs%

13%

2/12/15%

Spending%is%not%uniform%across%the%country%
Medicare%spending%per%enrollee,%2008%(adjusted%by%age,%sex,%race,%and%regional%price%varia@on)%

Source:%Dartmouth%Atlas%of%Health%Care.%Available%at:%htp://www.dartmouthatlas.org.%%

27%

Two^fold%varia@on%in%per%capita%Medicare%spending%
Adjus@ng%for%price%dierences%leads%to%only%a%
modest%decline%in%overall%varia@ons%
It%is%u@liza@on%^^%the%amount%of%care%delivered%
to%pa@ents%
o

65%years,%rates%of%arthri@c%knee%replacement%&%
hip%replacement%varied%by%a%factor%of%about%5,%and%
mastectomy%for%breast%cancer%by%7%
28%

14%

2/12/15%

Geographic%Varia@ons%(1)%
Large%dierences%across%the%country%in%
spending%for%the%care%of%similar%pa@ents%%
Only%partly%explained%by:%
o

Prices%of%health%care%services%%

Severity%of%illness%%

Income%and%preferences%of%individuals%%
29%

Geographic%Varia@ons%(2)%
Regional%dierences%in%the%supply%of%medical%
resources%%
Prone%to%low^cost,%highly%eec@ve%paterns%of%
care%vs.%high^cost%paterns%of%care%%
Reduce%spending%in%high^spending%regions%
without%producing%worse%outcomes%or%
reduc@ons%in%the%quality%of%care%%
Target%ineec@ve%or%harmful%treatment%
30%

15%

2/12/15%

Primary%Care%Doctors% Prac@ce%Styles %in%

Rochester,%NY%

31%

Supply%Sensi@ve%Care%
Describe%a%group%of%services%that%are%directly%related%
to%the%supply%of%physicians,%healthcare%facili@es,%and%
medical%equipment%
Examples:%%
Last%six%months%of%life,%the%#%of%physician%visits%per%
pa@ent%aged%65%varied%nearly%vefold%among%
regions,%from%13%to%60%visits%
Varia@on%in%intensity%of%inpa@ent%care%:%the%
propor@on%of%chronically%ill%pa@ents%who%had%
been%admited%to%an%intensive%care%unit%at%the%
@me%of%death%ranged%from%4%%to%31%%

32%

16%

2/12/15%

%%of%Deaths%Associated%with%Intensive%Care%Admission%
among%Chronically%Ill%Medicare%Enrollees%

What%do%you%think%is%the%
rela@onship%between%
higher%spending%and%
outcome?%%

Source:%Dartmouth%Atlas%of%Health%Care.%Available%at:%htp://www.dartmouthatlas.org.%%

33%

(
(
Regions%where%Medicare%spends%more%have%
more%poor%people%(
%
%
Does%poverty%explain%the%dierences%in%
spending?%%
%

34%

17%

2/12/15%

Income%is%only%one%factor%
Data%indicate%that%poverty%explain%litle%of%the%
varia@on%in%health%care%spending%across%
regions%%at%most%4%%
So%why%do%some%cri@cs%s@ll%believe%that%
income%mater?%
High%correla@on%between%poverty%and%poor%health%
But,%limited%access%to%care%may%prevent%people%
from%receiving%all%necessary%care%

On%average,%expensive%regions%have%sicker%
pa@ents%
But(their%higher%illness%levels%explain%only%
frac@on%of%the%overall%dierences%in%regional%
varia@ons%
People%are%more%likely%to%be% diagnosed %with%
a%disease%when%their%physician%or%hospital%
treats%them%more%intensively%
%This%bias%makes%pa@ents%in%high^intensity%areas%
appear%sicker%than%they%really%are.%%

%
36%

18%

2/12/15%

Is%higher%spending%associated%with%beter%
outcomes?%
No%rela@onship%between%spending%and%
outcome%for%ineec@ve%care%
Discre@onary%specialists%visits%and%test%
Hip%fractures%and%heart%atacks%treated%at%dierent%
hospitals%

Some%higher%spending%hospitals%do%have%
beter%outcomes%
Heart%failure%pa@ents%cared%for%at%six%California%hospitals%
and%found%that%pa@ents%cared%for%in%the%most%expensive%
hospitals%had%lower%mortality%
37%

Studies%come%to%dierent%conclusions%about%
whether%spending%and%quality%are%correlated%
One!study!showing!nega8ve!rela8onship!between!spending!and!quality!

Baicker%K,%Chandra%A.%Medicare%spending,%the%physician%workforce,%and%beneciaries'%quality%of%care.%Health%Aairs%2004;%
w4:%184^197.%

38%

19%

2/12/15%

Another%study%showed%a%posi@ve%rela@onship%
between%spending%and%quality%

Source:%Cooper%RA.%States%with%more%health%care%spending%have%beter^quality%health%care:%lessons%about%Medicare.%
Health%Aairs%2009;28(1):w103^w115.%

39%

Examples%of%Eec@ve%Care%
Pneumococcal%vaccina@ons:%45%%of%
Medicare%pa@ents%were%vaccinated,%while%
in%other%regions%it%was%over%95%%
More%than%a%ve^fold%varia@on%in%the%
percentage%of%diabe@c%pa@ents%receiving%
recommended%care%

40%

20%

2/12/15%

30%%of%the%na@on s%spending%may%be%
unnecessary%
Big%savings%if%all%regions%could%safely%reduce%
care%to%the%level%observed%in%low^spending%
regions%with%equal%quality%
Guidelines%and%payment%incen@ves%to%
persuade%doctors%to%change%their%treatment%
methods%based%on%clinical%eec@veness%
ndingsCompara@ve%Eec@veness%Studies%
41%

Case%Study:%McAllen,%TX(1)%
One%of%most%expensive%place%for%spending%in%
country%
Spend%2%@mes%more%on%Medicare%enrollee%than%
na@onal%average%

High%tech%MRI,%CT%scan,%full%range%of%surgical%
capabilityas%good%capability%as%other%places%
Quality%indicators:%hospital%lower%quality%than%
El%Paso%
Extra%spending%%beter%care%
42%

21%

2/12/15%

Case%Study:%McAllen,%TX%(2)%
High%u@liza@on^%greater%volume%of%tes@ng,%
surgeries,%specialists%visits,%home%nursing%
visits,%etc.%%
Providers%in%McAllen%agree%that%there%is%over^
u@liza@on%
Beter%medicine?%
Malprac@ce%?%

No%incen@ve%to%reduce%overuse^no%awareness%
that%whole%system%is%not%ecient%

43%

5%years%later%
Changed%reimbursement%incen@ves%%
Accountable%Care%Organiza@on%Health%
Providers%experiment%(Medicare%Shared%
Savings%Program)%
Focus%on%preven@ve%care,%high^risk%pa@ents%
%
Resulted!in!savings!of!millions!of!dollars!

22%

2/12/15%

HOW!CAN!WE!HOLD!DOWN!COST?!

Can%Beter%Compe@@on%Reduce%Costs?%%
Consumers%lack%informa@on%
- Lack%of%transparency%
Pa@ents%delegate%authority%and%
responsibility%for%health%care%decisions%
to%physicians%
Price%compe@@on%among%sellers%
(providers)%ineec@ve%
3rd%party%payers,%makes%consump@on%
not%price%sensi@ve%
Government%subsidizes%much%of%the%
market%failure%
46

23%

2/12/15%

Ideas%for%controlling%costs%
Changing%payment%to%prepaid%
Value^based%purchasing%^%changing%the%
way%we%pay%for%care,%from%doing%things%
to%achieving%outcomes%(quality)%
Controlling%price%(wage%and%price%
control)%
Controlling%supply%
Shi~ing%risk%to%individuals%
Compe@@on%
More%transparency%in%pricing%
47

Trends%in%Health%Care%Financing%
Move%from%volume%purchasing%(procedure^based%
care)%to%value^based%purchasing%(payment%based%
on%quality)%
Change%incen@ves%favoring%over%u@liza@on%

Integra@on%of%services%and%the%bundling%of%
payments%
Some%changes%in%reimbursement,%increasing%
primary%care%rates%
Focus%on%quality%
48%

24%

2/12/15%

%
Market%Changes?%
Realignment%of%the%major%players%
%Physicians%and%physician%groups%
%Hospitals%
%Insurance%companies%
%Other%providers%%

Ver@cal%integra@on%(e.g.%physician^hospital)%
Consolida@on%and%horizontal%integra@on%(e.g.%
hospital%merges)%
%
49%

Paying%for%Quality:%
Pay^for^performance%
Incen@ves%for%quality%
Penal@es%for%mistakes%
No%payment%for%readmissions%
No%payment%for%services%resul@ng%from%medical%errors%

Issues%
Adverse%selec@on%(staying%away%from%least%compliant%
pa@ents)%
Fraud%and%other%disclosure%issues%
Measurement%and%repor@ng%

25%

2/12/15%

Value%of%Medical%Spending%
The%value%diers%for%pa@ents%and%taxpayers,%health%
professionals,%and%premium^payers%
%
Value%is%reected%in%the%ques@on,%at%what%point%do%
Americans%choose%to%spend%less%on%health%care%and%
more%on%other%priori@es,%such%as%economic%
development,%housing,%educa@on%and%
infrastructure?%

Value^based%payment%
Example:%
Hospitals%Medicare%payments%are%now%@ed%to%
their%performance%
Penal@es%for%having%high%rates%of%hospital^
acquired%condi@ons%

Results^based%payment%systems:%payments%
linked%to%quality%and%safety%performance%

26%

2/12/15%

What%can%third^party%payers%do%to%achieve%
value?%
Iden@fy%a%set%of%services%for%which%they%will%cover%a%
set%popula@on%for%a%certain%premium%
%
Manage%costs%and%improve%quality%by:%
- Establishing%limited%provider%networks,%centers%
of%excellence,%and%@ered%networks%
- Developing%quality%incen@ve%programs%
- Using%end^of^life%and%disease%management%
programs%for%expensive%pa@ent%groups%

What%can%employers%to%do%achieve%value?%
Iden@fy%the%lowest%premium%and%the%best%benet%
package%they%believe%is%compe@@ve%in%their%
employment%market.%
Oer%wellness%programs%
Shi~%insurance%costs%to%employees%through%co^
payments%and%deduc@bles%

27%

2/12/15%

Gelng%more%value%for%the%money%we%spend%%
on%health%care%
Consume%less%medical%care%(if%you%had%to%pay%out^
of^pocket%for%this%service,%would%you%s@ll%do%it?)%
Pay%providers%based%on%the%value%of%care%provided%
Improve%coordina@on%of%care,%especially%for%chronic%
illnesses%
Increase%transparency%and%accountability%for%
providing%high^value%health%care%

What%else%can%be%done?%
There%is%room%for%improving%the%eciency%and%
quality%of%US%health%care%
Improvements%in%both%cost%and%quality%can%be%
achieved%by%suppor@ng%new%models%of%payment%%
Reward%providers%for%improving%quality,%managing%
capacity%wisely,%and%reducing%unnecessary%care%

Healthier%behavior%choices%and%beter%self^
management%of%chronic%diseases%will%be%
increasingly%important%
56%

28%