A Systemic Approach to Containing Health Care Spending


Posted by Joel Wittman

In this election year, U.S. national spending on health care will reach $2.8 trillion, or about 18% of total spending on all goods and services. This high level of spending reduces the ability to invest in other important parts of the economy and also adds to the national debt. There is wide agreement that ways must be found to bend the health care cost curve.

National health spending is projected to continue to grow faster than the economy, increasing from 18% to about 25% of the gross domestic product (GDP) by 2037.1 Federal health spending is projected to increase from 25% to approximately 40% of total federal spending by 2037. These trends could squeeze out critical investments in education and infrastructure, contribute to unsustainable debt levels, and constrain wage increases for the middle class.

Although the influx of baby boomers will increase the number of Medicare beneficiaries, growth in per capita health costs will increasingly drive growth in federal health spending over the long term. This means that health costs throughout the system drive federal health spending. Reforms that shift federal spending to individuals, employers, and states fail to address the problem. The only sustainable solution is to control overall growth in health costs.

Although the Affordable Care Act (ACA) will significantly reduce Medicare spending over the next decade, health costs remain a major challenge. To effectively contain costs, solutions must target the drivers of both the level of costs and the growth in costs — and both medical prices and the quantity of services play important roles. Solutions will need to reduce costs not only for public payers but also for private payers. Finally, solutions will need to root out administrative costs that do not improve health status and outcomes.

The Center for American Progress convened leading health-policy experts with diverse perspectives to develop bold and innovative solutions that meet these criteria.  See the following solutions below that were recommended:

Promote Payment Rates within Global Targets

Under the current fragmented payment system, providers can shift costs from public payers to private payers and from large insurers to small insurers. Since each provider negotiates payment rates with multiple insurers, administrative costs are excessive. Moreover, continued consolidation of market power among providers will increase prices over time. For all these reasons, the current system is not sustainable.

Under a model of self-regulation, public and private payers would negotiate payment rates with providers, and these rates would be binding on all payers and providers in a state. Providers could still offer rates below the negotiated rates.  The privately negotiated rates would have to adhere to a global spending target for both public and private payers in the state.

Accelerate Use of Alternatives to Fee-For-Service Payment

Fee-for-service payment encourages wasteful use of high-cost tests and procedures. Instead of paying a fee for each service, payers could pay a fixed amount to physicians and hospitals for a bundle of services (bundled payments) or for all the care that a patient needs (global payments).

Use Competitive Bidding for All Commodities

Evidence suggests that prices for many products, such as medical equipment and devices, are excessive. Instead of the government setting prices, market forces should be used to allow manufacturers and suppliers to compete to offer the lowest price. In 2011, such competitive bidding reduced Medicare spending on medical equipment such as wheelchairs by more than 42%. The ACA requires Medicare to expand competitive bidding for equipment, prosthetics, orthotics, and supplies to all regions by 2016.  It is suggested that Medicare expand the current program nationwide to include all commodities and extend to all federal health programs, including the insurance exchanges that will start in 2014.

Require Exchanges to Offer Tiered Products

The market dominance of select providers often drives substantial price variation. To address this problem, insurers can offer tiered plans. These insurance products designate a high-value tier of providers with high quality and low costs and reduce cost sharing for patients who obtain services from these providers.

Require All Exchanges to Be Active Purchasers

If exchanges passively offer any insurance product that meets minimal standards, an important opportunity will be lost. As soon as reliable quality-reporting systems exist and exchanges achieve adequate scale, it is critical that federal and state exchanges engage in active purchasing — leveraging their bargaining power to secure the best premium rates and promote reforms in payment and delivery systems.

Simplify Administrative Systems for All Payers and Providers

The United States spends nearly $360 billion a year on administrative costs, accounting for 14% of excessive health spending.  It is suggested that payers and providers electronically exchange eligibility, claims, and other administrative information as soon as possible and public and private payers and providers should use a single, standardized physician credentialing system.  Electronic health records should integrate clinical and administrative functions — such as billing, prior authorization, and payments.

Require Full Transparency of Prices

Price transparency would allow consumers to plan ahead and choose lower-cost providers, which may lead high-cost providers to lower prices. Although price transparency could facilitate collusion, this risk could be addressed through aggressive enforcement of antitrust laws.

Make Better Use of Nonphysician Providers

Eliminate restrictive state scope-of-practice laws prevent non-physician providers from practicing to the full extent of their training and provide adequate reimbursement for those services.

Expand the Medicare Ban on Physician Self-Referrals

It is suggested that the Stark law should be expanded to prohibit physician self-referrals for services that are paid for by private insurers. In addition, the loopholes for in-office imaging, pathology laboratories, and radiation therapy should be closed. Physicians who use alternatives to fee-for-service payment should be exempted because these methods reduce incentives to increase volume.

Leverage the Federal Employees Program to Drive Reform

It is suggested that the FEHBP align with Medicare by requiring plans to transition to alternative payment methods, reduce payments to hospitals with high rates of readmissions and hospital-acquired conditions, and adjust payments to hospitals and physicians on the basis of their performance on quality measures. In addition, the FEHBP should require carriers to offer tiered products and conduct competitive bidding on behalf of plans for all commodities. Finally, the FEHBP should require plans to provide price information to enrollees and prohibit gag clauses in plan contracts with providers

Reduce the Costs of Defensive Medicine

Regardless of whether a claim results in liability, the risk of being sued may cause physicians to practice a type of defensive medicine that increases costs without improving the quality of care.  A promising strategy would provide a so-called safe harbor, in which physicians would be presumed to have no liability if they used qualified health-information-technology systems and adhered to evidence-based clinical practice guidelines that did not reflect defensive medicine. Physicians could use clinical-decision support systems that incorporate these guidelines.

Conclusions

Although many in the health industry perceive that it is not in their interest to contain national health spending, it is a fact that the current spending patterns cannot continue. In the absence of any meaningful change, payers could simply shift costs to individuals. As those costs become more and more unaffordable, people would severely restrict their consumption of health care and might forgo necessary care. Alternatively, governments could impose deep cuts in provider payments unrelated to value or the quality of care. Without an alternative innovative strategy, these options could become the default. They are not in the long-term interests of patients, employers, states, insurers, or providers.

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public Service of New York University.  He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.

 

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