Promoting Cost-Effective Care: Consumer Incentives versus “Supply Side Strategy”

1. Promoting Cost-Effective Care: Consumer Incentives versus “Supply Side Strategy” Karen Davis President, The Commonwealth Fund Health System Change Conference December 3, 2003

2. Employer Health Benefit DesignFrom an Economic Perspective • If employers shift health insurance costs backward onto employees, rising costs don’t affect employers • Employers should be largely indifferent to extent of employee cost-sharing for benefits or employee share of premium • Employers should simply act as employees’ agent in obtaining the mix of health benefits and wages desired by employees • Employee can receive more in wages and less in health benefits or more in health benefits and less in wages • In such a world, total labor compensation is largely affected by productivity growth, e.g. if total compensation goes up 3% and health benefits are 15% of total compensation, and projected to rise by 12% in coming year, employer could offer: • 12% increase in health cost, 1.4% increase in wages • 10% increase in health cost, 1.8% increase in wages, or • 0% increase in health costs, 3.5% increase in wages • Employer should simply ascertain which is most preferred by employees • In real world, unlikely that backward shifting occurs perfectly or quickly • Employers want to obtain value for health benefit dollars • Society wants resources used efficiently • Equitable access to care for low-wage workers and equitable distribution of financial burden are important • Quality of care is important – e.g. no underuse or overuse or misuse

3. Cost-Sharing from Consumer Perspective • Cost-sharing in the U.S. is already high • Cost-sharing creates a burden on low-income and sick • Health care costs concentrated in sick few • Cost-sharing leads to underuse of appropriate care • Consumers rarely have the information to make choices based on quality and efficiency • Promoting cost-effective care directly by working on the supply side is a better strategy, e.g. • Research on cost-effective care • Clinical guidelines, quality standards • Public data on quality and efficiency • Financial rewards to providers for high quality, efficient care

4. HSC Issue Brief on Cost-Sharing • Important contribution • Shows higher cost-sharing falls disproportionately on low-income and sick • Most important finding is percent of population who are underinsured (i.e., at risk of spending more than 10% of income on health care if become seriously ill) under various cost-sharing scenarios • If focus on hospitalized patients – which could happen to anyone – 2-7% underinsured under modest copayments, 20% under cost-sharing in typical employer plans currently, 32% in a $1000 deductible plan similar to Health Savings Account legislation, and 66% under a $2500 deductible plan • Trend toward higher cost-sharing will increase numbers of underinsured

5. U.S. Patient Cost-Sharing is Highest Per Capita Out-of-Pocket Health Care Spending in Selected Countries, 2000 Dollars a a b c a 1999, b 1998, c 1996 Source: Anderson et al., Multinational Comparisons of Health Systems Data, 2002. The Commonwealth Fund, October 2002.

6. Cost-Sharing Blunt Instrument for Affecting Use of Appropriate Care • McGlynn NJEM June 2003 study finds that only 55% get indicated care • About 100 million Americans underuse care • About 30 million Americans overuse care • Increased cost-sharing will reduce overuse but will also increase the extent of underuse • Rand Health Insurance Experiment demonstrated this • More recent study in Canada with increased cost-sharing demonstrates that • NEJM December 4, 2003 study indicated prescription drug cost-sharing leads not to filling needed prescriptions • Most costs are concentrated in very sick few who have little control over decision-making for their own care, e.g. heart attack, stroke, trauma patients • High deductible plans not the way to control cost of high-cost cases

7. Cost Sharing Reduces Likelihood of Receiving Effective Medical Care Percent* In Cost-Sharing Plans * Probability of receiving highly effective care for acute conditions that is appropriate and necessary compared to those with no cost-sharing Source: K.N. Lohr et al., Use of Medical Care in the RAND HIE. Medical Care 24, supplement 9 (1986): S1-87.

8. Cost Sharing Reduces Both Appropriate and Inappropriate Hospital Admissions Percent reduction in number of hospital admissions per 1000 person-years *Based on Appropriateness Evaluation Protocol (AEP) instrument developed by Boston University researchers in consultation with Massachusetts physicians Source: A.L. Siu et al., “Inappropriate Use of Hospitals in a Randomized Trial of Health Insurance Plans,” New England Journal of Medicine 315, no. 20 (1986): 1259–1266.

9. Cost Sharing Reduces Use of Both Essential and Less Essential Drugs and Increases Risk of Adverse Events Percent reduction in drugs per day Percent increase in incidence per 10,000 Source: R. Tamblyn et al., “Adverse Events Associated With Prescription Drug Cost-Sharing Among Poor and Elderly Person,” JAMA 285, no. 4 (2001): 421–429.

10. Health Care Costs Concentrated in Sick Few Distribution of Health Expenditures for the U.S. Population, By Magnitude of Expenditure, 1997 Expenditure Threshold (1997 Dollars) 1% 5% 10% $27,914 27% 50% $7,995 55% $4,115 69% $351 97% Source: A.C. Monheit, “Persistence in Health Expenditures in the Short Run: Prevalence and Consequences,” Medical Care 41, supplement 7 (2003): III53–III64.

11. Hard to Design Cost-Sharing to Avoid its Pitfalls • Would have to vary by income and health status • Would have to vary by clinical indications for a given service, e.g. an MRI is appropriate for some conditions but not others • Patients would have to have access to information on quality that they do not now have • Even primary care physicians rarely have access to quality information on the specialists to whom they refer patients • Physicians are resistant to having quality data available • Would have to change patient-physician relationship with more control over decision-making by patients • Plans could create networks of high quality, efficient providers • Although their access to quality data and risk-adjusted longitudinal cost data are also limited

12. There is a Better Way:Walking on the Supply Side • A “supply side” strategy to promoting cost effective care shows more promise than increased patient cost-sharing • Instead of cost-sharing for ER use, nurse call banks are used by Partners Health Care to call patients with frequent use of ERs, screen for depression, medication compliance • Instead of cost-sharing for tests, Intermountain HealthCare puts clinical criteria for ordering tests before the ordering physicians • Instead of tiered cost-sharing for hospital care, University of Pennsylvania Hospital uses advanced practice nurses to work with high-risk hospitalized patients and reduce rehospitalization

13. Effect of Advanced Practice Nurse Care on Congestive Heart Failure Patients’ Average Per Capita Expenditures Dollars 9,618 6,152 Source: M.D. Naylor, “Making the Business Case for the APN Care Model,”report to the Commonwealth Fund, October 2003; estimated charges by Mark Pauly.

14. Achieving a High Performance Health System: What it Requires • Expansion of government’s role: • In setting quality standards/clinical guidelines on effective care • Supporting research on cost-effective care and cost-effectiveness of quality improvement interventions • Requiring public release of quality and efficiency data • Paying for performance within public programs (especially Medicare and Medicaid) • Public-private partnership: • Engage entire health care system in continuous quality improvement • Develop and disseminate quality improvement tools • Identify and spread best practices • Encourage learning collaboratives to improve care • Promote modern information technology • Reward quality and efficiency • Automatic and affordable health insurance for all

15. Acknowledgements Stephen C. Schoenbaum, Senior Vice President, Commonwealth Fund; Stephen C. Schoenbaum, Anne-Marie J. Audet, and Karen Davis, “Obtaining Greater Value From Health Care: The Roles of the U.S. Government,” Health Affairs, Nov/Dec 2003. Barbara Cooper, Senior Program Officer, Commonwealth Fund; Karen Davis and Barbara Cooper, American Health Care: Why So Costly, Commonwealth Fund, June 2003 Senate Testimony. Research assistance – Alice Ho, Research Associate, Commonwealth Fund Karen Davis, Achieving a High Performance Health System, Commonwealth Fund, forthcoming publication January 2004. Visit the Fund at: www.cmwf.org