Alleviating Our Value Deficit


Posted by Elaine Purcell

Fortunately, cutting healthcare costs is hardly a partisan issue. Especially during this time of economic downturn, policymakers and taxpayers alike are looking to cut costs anywhere they can. Regardless, where and by how much these expenses should be cut remains a major point of contention among policymakers across the political spectrum. Given the increasingly high costs associated with the healthcare system, it is not surprising that government healthcare programs have become low-hanging fruit for budget cuts—less than two years after the enactment of costly healthcare reform legislation.

Following the passage of the Affordable Care Act (ACA) of 2010, the Department of Health and Human Services reported that the bill would increase total national health expenditures by more than $200 billion from 2010-2019. In a statement by the Congressional Budge Office (CBO) in May 2010, they stated: Rising health costs will put tremendous pressure on the federal budget during the next few decades and beyond. In CBO’s judgment, the health legislation enacted earlier this year does not substantially diminish that pressure.

ACA’s prospects of cutting costs may appear grim. In 2010 alone the United States spent$2.6 trillion on healthcare – over $8,000 per American. For more than 30 years now, healthcare costs have been growing at a rate 2% greater than the general economy. As an additional portion of the U.S. population gains insurance through expanded government healthcare programs, can we actually afford this new legislation?

A simple answer to this question is derived from basic financial principles: in order to achieve a return on an investment, one must actually make an investment. Nevertheless, the stakes are high and the nuances lie in how to not only achieve a return, but the greatest return from our $200 billion/year investment in the healthcare system.

To achieve the greatest return, we cannot only focus on reducing costs – we must strive to also improve quality. Ranked by the World Health Organization as the highest in costs but 37th in overall performance, the U.S. healthcare system is evidently experiencing a ‘value-deficit,’ which is truly at the crux of our nation’s healthcare problems.

One of the strongest themes pervasive throughout ACA is the generation of more information. More information on the top hospitals and the best doctors. More information on the medications that are most effective for treating certain conditions and patient populations. More information on how health plans’ benefit packages compare to others. According to basic market principles, additional and more accessible information will drive competition, which in turn, will force the suppliers of healthcare services to lower their costs and improve quality.

Regardless, in order to achieve greater competition, healthcare consumers must also change their behavior. They need to better understand their purchasing decisions. It’s ironic that with a commodity as priceless as good health, so many patients passively accept or deny treatments and services provided based on limited information. Patients must have the gumption to research their condition and choose providers or medication based on unbiased and comprehensible information.

Nevertheless, due to the nature of healthcare insurance, few patients are cognizant of healthcare costs. To alleviate this moral hazard, the financial burden must be extended to either the patient or the provider. ACA focuses primarily on the provider through carrot and stick approaches, such as pay-for-performance (P4P) programs, which reward physicians for providing the best care. Further, P4P penalizes physicians for over- providing care, thus making them more accountable for costs associated with the care they deliver.

To alleviate moral hazard on the patient side is more complicated and risky. Healthcare consumers are often more price elastic than one would predict, given that they currently lack the information and training to predict the consequences of foregoing certain preventive measures and early interventions. Nevertheless, applying co-payments on certain procedures and not others (such as mammograms) may encourage patients to be more wary of the amount and type of healthcare they consume.

Ultimately, the simplest equation for alleviating the value-deficit is this: costs divided by quality. Although this is undoubtedly more difficult to achieve than simple division, this basic equation should be the basis for solving the problems of our healthcare system.

Elaine Purcell is a second year graduate student in Wagner’s Health Policy and Management Program focusing on Healthcare Management and Administration. Prior to Wagner, she worked in Washington, DC analyzing healthcare policy during the passage of national healthcare reform.