Perspective on the main drivers of excess growth in healthcare spending in the United States and summarizes different approaches to reform.

1. Health policy primer: What’s wrong
with American healthcare?
JDG

2. “How can it be that ‘the best medical care in the world’ costs
twice as much as the best medical care in the world?”
– Professor Uwe Reinhardt
The American taxpayer is financing these large differences in costs, but
we have little evidence of what benefit we receive in exchange.
http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/93xx/doc9317/05-29-nasi_speech.pdf

3. Looking forward, Medicare spending is projected to grow by at least 5.5% per
year for at least the next 10 years, while GDP is at best going to grow about
2.5% on average. Since goverment revenue roughly tracks GDP, this 3 percent
gap between Medicare vs. GDP growth is what drives our chronic, structural
deficit that's bankrupting the US.
Medicare/Medicaid spending as percent of GDP
Percent GDP
Year
Source: http://content.healthaffairs.org/content/31/7/1600.abstract

4. Notice the two lines in the graph: “Effect of Aging Alone" and "Effect of Excess Cost Growth."
The latter, excess cost growth, is actually the major driver of excess, wasteful spending -- what we call
"medical cost inflation." That cost inflation is fueled by taxpayer-funded OVER-spending by Medicare
on exorbitantly priced medical technology that often does not improve health. Medicare is formally not
allowed to consider cost when determining whether to pay for a new treatment, device, or technology
(nor does Medicare negotiate on price). As a result, hospitals compete by adopting the most
expensive new technology available - in spite of the lack of proven comparative health benefits.
Source: http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/93xx/doc9317/05-29-nasi_speech.pdf

5. What is a healthcare system supposed to do?
When looking at any model of insurance, public or private, you want to look at
how the model promotes thrift on both price and utilization rates, since Total
Spending = Price of all services (P) x Quantity of all services provided (Q).
A series of studies have shown that in general, higher spending shows little
association with improved health outcomes:

6. Why do we want to restrain utilization?
A series of studies have shown that in general, higher spending
shows little association with improved health outcomes:
“For all of the quality indicators studied,
the association with spending is either nil
or negative. The absence of positive
correlations suggests that some
institutions achieve exemplary
performance on quality measures in
settings that feature lower intensity of
care.”
http://content.healthaffairs.org/content/28/4/w566.abstract

7. More evidence….
“Quality of care in higher-spending
regions was no better on most measures
and was worse for several preventive
care measures…. Neither quality of care
nor access to care appear to be better
for Medicare enrollees in higher
spending regions.”
http://www.annals.org/content/138/4/273.abstract

8. And a famous experiment on different health plans showed that there is an optimum level of
utilization that can be achieved with the right level of cost sharing: not overly generous but not
dissuading needed care:
“In general, the reduction in services induced by cost
sharing had no adverse effect on participants’ health.”
http://www.rand.org/pubs/research_briefs/RB9174/index1.html

9. With that in mind, Americans do not differ much from other OECD countries in our
utilization rates, yet we spend nearly twice the OECD median on healthcare:
Source: http://www.oecd.org/dataoecd/12/16/49084355.pdf

10. Which has led to the conclusion that the US pays disproportionately high prices for a
similar amount of healthcare being provided:
Source: http://content.healthaffairs.org/content/22/3/89.full.pdf

11. Here's a more direct illustration of the prices we pay:
Source: http://www.ifhp.com/documents/2011iFHPPriceReportGraphs_version3.pdf

12. Source: http://www.ifhp.com/documents/2011iFHPPriceReportGraphs_version3.pdf

16. All of this points to the need to be more aggressive not only in negotiating prices, but
in understanding the value of the services we're paying for. There is room for market-
based principles here:
Source: http://www.economist.com/node/21546059

17. Consumer-driven (high-deductible) health plans have been shown to save 14 percent
on cost, in comparison with traditional health plans:
Source: http://www.ajmc.com/publications/issue/2011/2011-3-vol17-n3/AJMC_11mar_Buntin_222to230

18. At the same time, the delivery of healthcare is incredibly arcane to most consumers, and
shopping around on prices is a nightmare – and prices can vary by magnitudes of 100!
http://well.blogs.nytimes.com/2012/04/23/the-confusion-of-hospital-pricing/

19. More transparency on pricing will go a long way towards empowering consumers to
seek the most value for their healthcare dollars.
http://www.latimes.com/business/la-fi-adv-medical-prices-
20120415,0,1276328,full.story

20. But in many other healthcare systems, the government is much more involved in
setting reimbursement rates that reflect the value of the care being provided.
Source: http://www.washingtonpost.com/business/high-health-care-costs-its-all-in-the-
pricing/2012/02/28/gIQAtbhimR_story.html

21. So, there is a major role for comparative-effectiveness research to
help shed light on what procedures and new medical innovations
truly deliver 'high-value, cost-conscious' care – and which ones are
simply overkill - i.e. more emphasis on primary & preventive care
would deliver better health than expensive, unnecessary
procedures, and often redundant, poorly coordinated care.
For more on this, see “Box 1,” pg 11-12:
http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/87xx/doc8758/11-13-lt-health.pdf

22. But – How does Medicare’s payment policy compare to
other country healthcare systems?
Medicare adopts new treatments under a process called a 'National Coverage
Determination,' wherein CMS is not formally allowed to consider cost.
Medicare recently adopted a therapeutic vaccine for late-stage prostate
cancer that costs $93,000 per patient -- this, despite the fact it's proven to
only extend life by about 4 months.
Source: http://www.washingtonpost.com/national/medicare-moves-to-pay-for-prostate-cancer-drug-
provenge/2011/03/30/AFXzam4B_story.html

23. And private insurers typically follow Medicare’s lead in
determining what to cover.

24. As a result, hospitals compete with each other by adopting the newest and most
expensive technology available in efforts to win higher reimbursement rates and
attract better physicians.
“Hospital costs are soaring
across the Washington area
as the cost of buying the
newest technologies jumps
and more uninsured patients
take their toll.”

25. Driving the ballooning costs are ever-growing – and costly –
medical technologies
Source: http://washingtonexaminer.com/local/maryland-news/2012/05/hospital-rates-jump-across-
washington-region/592766

26. Singapore, one of the world’s top-rated healthcare systems, faced this same problem
and was able to achieve cost control by limiting the rate at which new, unproven
technology could be introduced into public hospitals.
Source: http://www.healthbeatblog.com/2008/07/health-care-in.html

27. There is a confluence of movements within the U.S. medical community going on to
“Choose Wisely” and lead in this direction of "high value, cost conscious care":
http://www.abimfoundation.org/Initiatives/Choosing-
Wisely.aspx
… but ultimately, more must be
done at the policy level to
promote reform in the way we
pay for healthcare – and how
much we pay. http://www.annals.org/content/156/2/147.full.pdf+html

28. To summarize…
3 major steps will go a long way to reducing healthcare spending
in the US:
• Moving consumers into a paradigm of high-deductible, consumer-driven health
plans with attached health savings accounts*
• Requiring greater transparency and consistency in pricing among hospitals and
other providers (while enforcing consistent quality of care standards)*
• Incorporating comparative-effectiveness research (CER) into Medicare payment
policy, thereby pushing producers of technology and pharmaceuticals to bring
products into the market that demonstrate value in comparison to the current
standard of care or generic alternative.
This isn’t a comprehensive list of how to reform Medicare, but it could be a
strong start towards a more efficient healthcare system.
*Note: The Affordable Care Act contains provisions that seek to achieve both of these objectives. ACA also
introduces comparative effectiveness research but it is questionable whether CER will play a central role in
reforming Medicare reimbursement. (For more, see p. 8-9: http://www.kff.org/healthreform/upload/8061.pdf)

29. The over-arching goal is to FLATTEN the cost curve that drives
medical cost inflation
The ability of the U.S. to maintain a sustainable level of spending and
remain solvent as a nation depends almost exclusively on this problem
being solved.

30. Pessimists vs. Optimists
• Glass half empty: The U.S. healthcare system is grossly inefficient
and is ill-equipped to deliver the same standard of quality care to the
increasing burden of retirees while spending twice the OECD median per
capita on care. Healthcare spending is projected to continue driving up
national debt indefinitely.
• Glass half full: The country can afford to spend drastically
less on healthcare and still deliver excellent quality care to its
citizens, while stabilizing the cost curve and finally setting the
US on a path to shrink the national debt. Smart policymakers
have an opportunity to seize and can work together to make
this a reality.