Stewart Altman

Is It Possible for The U.S. to Is It Possible for The U.S. to Control Health Care Costs?Control Health Care Costs?

Stuart H. Altman, Ph.D.Stuart H. Altman, Ph.D.

Sol C. Chaikin Professor of National Health PolicySol C. Chaikin Professor of National Health PolicyThe Heller School for Social Policy and ManagementThe Heller School for Social Policy and Management

Brandeis UniversityBrandeis University

y = 64.645x + 504.38

0

500

1000

1500

2000

2500

3000

3500

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Per

Cap

ita

NH

E in

$ Per Capita Growth In Health Expenditures Per Capita Growth In Health Expenditures

Has Been Growing at 2% Above InflationHas Been Growing at 2% Above InflationFor 40 Years---For 40 Years---Will We Change It?Will We Change It?(adjusted for inflation)(adjusted for inflation)

The U.S. Has In The Past Tried To The U.S. Has In The Past Tried To Control Health Spending---Control Health Spending---

BUT----With Limited Success and BUT----With Limited Success and For a Limited Time PeriodFor a Limited Time Period

0

500

1000

1500

2000

2500

3000

3500

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Per

Cap

ita

NH

E in

$

Gov’t Reg.

M&M Begins

Managed Care

?

Little Reg./Little Mkt.

Y = 52.703x – 102898Y = 52.703x – 102898

Y = 40.31x – 78465Y = 40.31x – 78465

Y = 88.486x – 173967Y = 88.486x – 173967

Y = 37.925x – Y = 37.925x – 7319573195

Y = 107.95x – 1025.3Y = 107.95x – 1025.3

The Changing Growth Pattern of Per Capita The Changing Growth Pattern of Per Capita National Health Expenditure National Health Expenditure

1966-20051966-2005(adjusted for inflation)(adjusted for inflation)

Why Reform Legislation In Why Reform Legislation In Massachusetts and Proposed Massachusetts and Proposed

National Reform Have Limited National Reform Have Limited Cost ReductionsCost Reductions

If Legislation Included Serious If Legislation Included Serious Control of Costs---Control of Costs---

I fear We Could Not RepealI fear We Could Not Repeal

Altman’s LawAltman’s Law

Altman’s LawAltman’s Law

Most Every Powerful Most Every Powerful Constituent Group Favors Constituent Group Favors

Health Reform BUT If It is Not Health Reform BUT If It is Not Their Plan They Prefer The Their Plan They Prefer The

“Status Quo”“Status Quo”

But--- Current Rebellion Against But--- Current Rebellion Against National Health Reform Centers National Health Reform Centers On Anger of Citizens That Want On Anger of Citizens That Want

Lower CostsLower Costs

However They Do Not Want Any However They Do Not Want Any Restrictions on Where They Get Care Restrictions on Where They Get Care and How Much Care They Receive!and How Much Care They Receive!

Where Do We Go From Where Do We Go From Here?Here?

Without Health ReformWithout Health Reform

Medicare Trust Fund Could Go Medicare Trust Fund Could Go Broke By 2017Broke By 2017

The Problem Is Not Medicare’s The Problem Is Not Medicare’s Alone It Is Our Entire Health Care Alone It Is Our Entire Health Care

SystemSystem

Even With No Change In Coverage Even With No Change In Coverage Government Will Dominate Government Will Dominate

Institutional PaymentsInstitutional Payments

54.4%

66.3%

37.5%

24.8%

5.5% 7.3%2.6% 1.7%

0%

10%

20%

30%

40%

50%

60%

70%

Gov. Pvt. Uncomp. Care Other

Proportion Of Hospital Expenses Attributed To Patients By Payer Source

20002025

If Payment Reductions Focus If Payment Reductions Focus Only on Government Spending Only on Government Spending

Amounts ---Amounts ---

What About Private Payment What About Private Payment Rates?Rates?

Does Cost Shifting Exist?Does Cost Shifting Exist?

Can Private Insurance Payments Continue To Can Private Insurance Payments Continue To Pay For The Shortfall In Government PaymentsPay For The Shortfall In Government Payments

Source: Avalere Health analysis of American Hospital Association Annual Survey data, 2005, for community hospitals. (1) Includes Medicaid Disproportionate Share payments.

92.0%

85.0%

138.0%130.0%

157.4%

60%

80%

100%

120%

140%

160%

180%

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Medicare Medicaid(1) Private Payer

Hospital Payment-to-Cost RatiosHospital Payment-to-Cost Ratios(Government Ratios Maintained at Current Levels) (Government Ratios Maintained at Current Levels)

What is Driving Increases In What is Driving Increases In Health Costs?Health Costs?

Price Increases Versus Growth In Price Increases Versus Growth In Use of Services!Use of Services!

Factors Affecting Per-Capita Spending Factors Affecting Per-Capita Spending Trend for Hospital Services 1994-2004Trend for Hospital Services 1994-2004

-1.0%

1.0%

3.0%

5.0%

7.0%

9.0%

11.0%

13.0%

94 95 96 97 98 99 00 01 02 03 04

Quantity Price Spending

Source: Strunk et al. “Health Care Costs: Declining Growth Rate Pauses in 2004,” Health Affairs, June 2005 .

What Is Driving Health Insurance What Is Driving Health Insurance PremiumsPremiums

Price vs. UtilizationPrice vs. Utilization

25%

75%

43%

54%57%

46%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2002 2005 2007

Percentage of GrowthRelated to Utilization

Percentage of GrowthRelated to Price Increases

Mckinsey Global Institute: “Accounting for the Cost of Health Care in the United States

Even If Price Increases Now Even If Price Increases Now Dominate The Growth in Dominate The Growth in

SpendingSpending

The Focus Must Be On Changing the The Focus Must Be On Changing the Delivery System To Improve Productivity Delivery System To Improve Productivity

and Eliminate Unnecessary Servicesand Eliminate Unnecessary Services

Any Significant Restructuring of Any Significant Restructuring of Healthcare Delivery System Will Healthcare Delivery System Will

Require Reimbursement Systems That Require Reimbursement Systems That Supports Such Behavior ---Supports Such Behavior ---

Fee-for-Service System Needs to be Fee-for-Service System Needs to be Modified or Abandoned!Modified or Abandoned!

Options For Changing Options For Changing Payment SystemPayment System

• Bundled or Case PaymentsBundled or Case Payments• Significant Pay-for-Performance Add-On Significant Pay-for-Performance Add-On

or Penaltiesor Penalties• Value-Based PaymentsValue-Based Payments• Permit Wider Use of “Gain-sharing” Permit Wider Use of “Gain-sharing”

Between Hospitals and DoctorsBetween Hospitals and Doctors

Aligning Incentives Between Aligning Incentives Between Hospitals And DoctorsHospitals And Doctors

• The Importance of a Value-Based Payment System ---– Allows Hospitals to Be Rewarded for More

Appropriate and Cost Effective Care

– Permits Hospitals to Share With Physicians The Benefits of Higher Valued Care

• Need Transparency and Elimination of Conflicts of Interest

Massachusetts Actively Working Massachusetts Actively Working To Develop A Cost Containment To Develop A Cost Containment

StrategyStrategy• Two State Level Commissions Have Recommended Two State Level Commissions Have Recommended

Restructuring State Health Payment SystemRestructuring State Health Payment System– Bundle or Global PaymentsBundle or Global Payments

– Focus on Integrated Care With Incentives for Value Added Focus on Integrated Care With Incentives for Value Added ServicesServices

– Limits on Growth in SpendingLimits on Growth in Spending

• Governor and Legislature Reviewing OptionsGovernor and Legislature Reviewing Options• Largest Private Insurer—BCBS Developed Voluntary Largest Private Insurer—BCBS Developed Voluntary

Global Payment System Global Payment System

What Payment/Delivery System What Payment/Delivery System Changes Was To Be In Reform Changes Was To Be In Reform

LegislationLegislation

Components of Reform That Components of Reform That Could Lower SpendingCould Lower Spending

• Simplify Administration FunctionsSimplify Administration Functions– Financial and Eligibility RequirementsFinancial and Eligibility Requirements– Enrollment and DisenrollmentEnrollment and Disenrollment– Electronic Payment TransactionsElectronic Payment Transactions

• Reduce Medicare Spending Reduce Medicare Spending – Medicare Advantage PlansMedicare Advantage Plans– Disproportionate Share PaymentsDisproportionate Share Payments– Update PaymentsUpdate Payments– Reduce Payments for Hospital-Acquired Conditions Reduce Payments for Hospital-Acquired Conditions

and Preventable Readmissionsand Preventable Readmissions– More Powerful Medicare Advisory CommiMore Powerful Medicare Advisory Commission

• Implementation of Cost Reducing Pilot Implementation of Cost Reducing Pilot ProgramsPrograms

• Medicare Innovation CenterMedicare Innovation Center

Components of Reform That Components of Reform That Could Lower SpendingCould Lower Spending

• Drug PricingDrug Pricing– House Would –House Would –

• Require Secretary to Negotiate prices With Require Secretary to Negotiate prices With Pharmaceutical Manufacturers Pharmaceutical Manufacturers

• Increase Medicaid Drug RebatesIncrease Medicaid Drug Rebates• Require Institute of Medicine to study geographic Require Institute of Medicine to study geographic

variation in Medicare spending and recommend variation in Medicare spending and recommend revising geographic adjustment factorsrevising geographic adjustment factors

• Increase funding for comparative effectiveness Increase funding for comparative effectiveness researchresearch

• House --- Incentive payments to States that enact House --- Incentive payments to States that enact medical liability laws that simplify the systemmedical liability laws that simplify the system

Components of Reform That Could Improve Components of Reform That Could Improve Quality And Health System Performance Quality And Health System Performance

• Establish Medicare and Medicaid pilot programs that Establish Medicare and Medicaid pilot programs that bundle payments for most healthcare servicesbundle payments for most healthcare services

• Create Medicare independence at home Create Medicare independence at home demonstrationsdemonstrations

• Establish Center for Quality ImprovementEstablish Center for Quality Improvement• Establish Community-based collaborative care Establish Community-based collaborative care

network program for chronic care and emergency network program for chronic care and emergency department caredepartment care

• Establish national prevention, health promotion and Establish national prevention, health promotion and public health councilpublic health council– Remove Medicare cost sharing for proven preventative servicesRemove Medicare cost sharing for proven preventative services

Components Of Reform That Could Components Of Reform That Could Improve Quality And Health System Improve Quality And Health System

Performance Performance • Long-Term CareLong-Term Care

– Establish a National Voluntary Payroll Deduction Insurance Establish a National Voluntary Payroll Deduction Insurance Program for Community Living AssistantsProgram for Community Living Assistants

– New Medicaid Options for Home and Community-based servicesNew Medicaid Options for Home and Community-based services

• Workforce TrainingWorkforce Training– Increase Unused GME Positions for Primary Care and Increase Unused GME Positions for Primary Care and

General SurgeryGeneral Surgery– Increase Scholarship Funding for Primary Care and other Increase Scholarship Funding for Primary Care and other

shortage occupationsshortage occupations

• Expand Requirements for Non-profit Hospitals to Expand Requirements for Non-profit Hospitals to Conduct Community Needs Assessment and help Conduct Community Needs Assessment and help support programs to meet critical community needs support programs to meet critical community needs

Will End of Health Reform and Will End of Health Reform and Recent Slowdown In Growth Of Recent Slowdown In Growth Of

Healthcare Spending Blunt Health Healthcare Spending Blunt Health Cost Containment Efforts?Cost Containment Efforts?

What About The Potential What About The Potential Bankruptcy of The Medicare Trust Bankruptcy of The Medicare Trust

Fund?Fund?

National Health Expenditure National Health Expenditure Growth Slows In 2008Growth Slows In 2008

4.4%

6.0%

6.6%

7.9%

6.6%

0%

2%

4%

6%

8%

10%

2000 2005 2006 2007 2008

Growth In Spending By Type of Growth In Spending By Type of Service Service

20082008

0.7%

3.2%

4.4%

5.0%

4.5%

Administration & Private HealthInsurance

Prescription Drugs

Physician & Cinical Care

Hospital Care

Over all

But Percent Of GDP Spent on But Percent Of GDP Spent on Healthcare Keeps GrowingHealthcare Keeps Growing

Percentage of GDP Spent on Health care

13.6%15.7% 15.8% 15.9% 16.2%

0%

5%

10%

15%

20%

2000 2005 2006 2007 2008