Health Care Reform Cost Savings

1. Health Care Reform Cost Savings Julie Sonier Director, Health Economics Program Minnesota Department of Health SCI Summer Meeting July 31, 2008

2. Key Questions • What are the potential savings associated with health care reform? • Potential is believed to be significant, but is difficult to demonstrate • How can savings be measured? • How can savings be “captured” for other uses (such as coverage expansion)?

3. Issues in Estimating and Capturing Savings • Lack of research studies documenting or estimating savings • Many reform ideas have not been tried on a large scale • Some have been tried but are too new to have generated much evidence • No guarantees that “potential” savings will materialize • Hard to predict interactions in complex system • Success of many reforms depends on buy-in and engagement of a wide range of stakeholders • Savings are systemwide, and not necessarily “bookable” for state budget purposes • Savings are more likely to materialize as lower rates of spending growth than reductions in the level of spending

4. Major Sources of Potential Savings in Minnesota’s 2008 Health Reform Law • Population health improvement • Overweight/obesity and tobacco use result in demonstrably higher health care costs • Reducing their prevalence should save money • Payment reform • Administrative efficiency

5. Impact of Rising Obesity on Health Care Costs(Ken Thorpe study using national data) • Increasing prevalence • Between 1987 and 2001, obesity prevalence increased 10.3 percentage points, while normal weight prevalence declined 13 percentage points • Increasing gap between health care spending for obese vs normal weight population • Difference grew from 15% to 37% between 1987 and 2001 • As a result of both these factors, obesity-related health spending accounted for an estimated 27% of inflation-adjusted per capita health spending increases • 41% of the rise in heart disease spending • 38% of the rise in diabetes-related spending Source: Thorpe et al., “The Impact of Obesity on Rising Medical Spending,” Health Affairs, October 2004.

6. How Is Payment Reform Expected to Result in Savings? • Sources of potential savings: • Consumers will shift to lower-cost providers • State employee group experience shows that consumers are price sensitive • Increased provider competition on price • Again, state employee group experience shows that providers will lower prices to get into preferred tiers • Provider incentives to re-design delivery of care in ways that provide higher quality care at lower cost • Reduce the need for expensive, avoidable interventions • Reduce investment in and use of “supply sensitive” or “preference sensitive” services

7. Other Evidence/Experience Related to Potential Savings from Payment Reform • Medicare • Wide variations in utilization and cost, and no association (or a negative association) with quality or health outcomes • Estimated potential savings up to 30% from reducing variations in practice patterns* • Minnesota state employee group • 63% difference between highest-cost and lowest-cost provider groups (risk-adjusted) • Buyers’ Health Care Action Group • “Care system” bidding for total cost of care for a patient population in 1990s • Ultimately, this coalition of large private employers (about 200,000 covered lives at its peak) lacked the critical mass needed to move the market Wennberg et al., “Geography and the Debate Over Medicare Reform,” Health Affairs web exclusive, February 13, 2002.

8. Key Issues for Realizing Savings Through Payment Reform • The delivery system will only change if: • Consumers have a reason to consider cost and quality in making decisions: • Insurance benefit sets • Available information on variation in cost and quality • Providers are rewarded for providing care more efficiently and avoiding unnecessary services • Need to pay explicitly for things like care coordination, and align financial incentives • There is a critical mass of health plans, purchasers, and consumers committed to changing the status quo

9. Administrative Efficiency • Implementing fully interoperable electronic health records – estimated at 4.3% potential net long-term savings in a report for the State of Oregon • Savings are a result of both reduced medical costs (1/3) and increased productivity and lower administrative costs (2/3) • Requires substantial up-front investment • Administrative transaction simplification: • Estimated $215 million in savings for FY 2008-2012 by implementing standard electronic transactions for: • Eligibility verification • Health care claims • Payment and remittance advice

10. What Have We Learned in Minnesota? • There is no “magic model” with the answers to these complex questions • It’s much more an art than a science • But: there are reasonable ways to “ballpark” potential savings • Take advantage of the information that is out there • Use examples from national research • Dartmouth Atlas work on variations in cost and utilization • Thorpe work on obesity • Commonwealth Fund’s “Bending the Curve” report • Use examples and reports from other states

11. Measuring and Tracking Savings • Savings from 2008 health reforms will be tracked, in an aggregate way: • Project health care spending in the absence of reform, measure actual spending, and define the difference as savings • When $50 million in savings is certified, repayment of a loan from the health care access fund to the general fund is triggered • Not the same as savings “recapture”, since this transaction is just a shift of funds within state government • Earlier versions of the health reform bill included a savings recapture mechanism based on the difference between projected and actual spending

12. Contact Information Julie Sonier, Director Health Economics Program Minnesota Department of Health 651 201-3561 julie.sonier@state.mn.us Website: www.health.state.mn.us/healtheconomics