Bending the Cost Curve

1. Bending the Cost Curve Michael A. Morrisey, Ph.D. UAB Lister Hill Center for Health Policy 30th Annual National Symposium for Health Care Executives Sandestin, FL August 6, 2010

2. The Issue What would it take to reduce health care spending by an appreciable amount?

3. The Options • Prevention • Comparative Effectiveness Research • Malpractice Reform • Selective Contracting • Consumer Directed Health Care • Medicare Reform • Tax Treatment of Employer Sponsored Health Insurance

4. Background • Trends • Insurance Premiums • Medicare • Health Care Reform • All Together • The Tax Baseline • The Options

5. Employer Sponsored Health Insurance $13,375 $4,824 Source: Claxton et al. Health Affairs (Sept/Oct 2009)

6. Percentage Increase in Health Insurance Premiums Sources: data from Jensen et al. (1997), Gabel et al. (2005), and Fronstin (2006), updated data from Claxton et al. Health Affairs (Nov/Dec 2008 & Sep/Oct 2009))

7. Medicare’s Troubles • Baby boomers • Rising spending per beneficiary • Expanding coverage • Health care reform

8. Medicare Sources of Non-Interest Income & Expenditures as a Percentage of GDP Source: 2010 Medicare Trustees Report, Chart D

9. Medicare’s Troubles • Baby-boomers • 27-35% of growth* • Rising spending per beneficiary • 57-61% of growth* • 21-25% the interaction of aging & spending* • Expanded benefits • Part D – prescription drug coverage • Health care reform • Net reduction of $310.8 billion** Sources: * CBO (May 2008), ** CMS, Office of the Actuary (April 2010)

10. Health Care Reform • Provide subsidies through the exchanges • Expand Medicaid to adults aged 19 to 64 • Subsidies to the small group market

11. CBO Spending & RevenueEstimates of PPACA (in billions), 2010-2019 CBO, March 20, 2010 – Table 2

12. Health Spending as % of GDP Percent of GDP 17.6% Sources: CMS (2009) and Dept. of Commerce (2010)

13. Health Spending as % of GDP- with Health Care Reform - 21.0% Percent of GDP XX XX XX Sources: CMS (2009), Dept. of Commerce (2009), CMS, Office of the Actuary (2010)

14. The Tax Baseline

15. CBO’s Scenario • Consider federal health care spending per capita relative to per capita GDP • Accounts for economic growth • Abstracts from the distortions of population changes • Health spending trend assumptions: • 1 percentage point above growth in per capita GDP • 2.5 percentage points is the 40 year trend

16. Health Care at 1 Percentage Point Above GDP Growth • Individual tax rates would have to increase by at least 70% to finance the spending Tax rates change: Lowest bracket 10% 17% Middle bracket 25% 43% Highest bracket 35% 60% • Real GDP would be 3 to 16% lower. Source: CBO, “Financing Projected Spending in the Long Run,” (July 9, 2007)

17. Health Care at 2.5 Percentage Points Above GDP Growth • Tax rates would have to increase 160%: • Lowest bracket 10% 26% • Middle bracket 25% 66% • Highest bracket 35% 92% • With “substantial” reductions in GDP Source: CBO, “Financing Projected Spending in the Long Run,” (July 9, 2007)

18. The Options

19. Option: Preventive Care • Preventive care is a good thing • …but it typically doesn’t save money • The issue is incurring the costs of screening many now to avoid the downstream costs of a few.

20. Option: Comparative Effectiveness Research (CER) • “…the legislation stipulates that findings from CER cannot, by themselves, determine Medicare coverage policy.” • “…[PPACA] includes explicit prohibitions on the use of CER funds to calculate so-called quality-adjusted life years, used in assessing the relative value of interventions.” • “…cost-effectiveness evaluation will not be part of [PPACA]-financed CER.” Mathematica, Politics and Policy of CER: Looking Back, Looking Ahead (June 2010)

21. Option: Malpractice Reform • Litigation and fear of litigation are said to lead to high malpractice premiums and extensive use of defensive medicine. • …but malpractice premiums in total represent much less than 2% of health care costs • …and only limited evidence that tort reform reduces defensive medicine • …We find no link between tort reform and changes in ESHI premiums* *Source: Morrisey, et al., ““Medical Malpractice Reform and Employer Sponsored Health Insurance Premiums,” Health Services Research (December 2008).

22. Selective Contracting • Negotiate Lower Prices with Providers • Re-emergence of narrow panel networks of providers trading price for volume • Price competition among providers

23. Percentage Increase in Health Insurance Premiums Sources: data from Jensen et al. (1997), Gabel et al. (2005), and Fronstin (2006), updated data from Claxton et al. Health Affairs (Nov/Dec 2008 & Sep/Oct 2009))

24. Impact of Selective Contracting? • 8% actual reduction in hospital costs • Gaskin and Hadley (1997) at the peak of the managed care boom • 15% maximum potential reduction in hospital cost growth • Bamezai et al. (1999) • 18% lower actual hospital prices in markets with the most hospitals relative to those with least • GAO (2005)

25. Option: Consumer Directed Health Plans • Provide health insurance with large deductibles • $3,000 to $5,000 to $10,000 or more • Make consumers face the real prices of health services • $125 physician office visit not just the $20 copay • Creates incentives for value purchasing

26. CDHP Cost Savings? • Most credible evidence (I know of) suggests savings of, at most, 8% of health care spending. • Ozanne (1996) • Advocates argue for centers of excellence, etc., but this really relates to selective contracting • See above

27. Option: Medicare Reform • Reduce payments to providers • $196 billion between 2010 and 2019 (3.8%) • But, one extension already granted… • Reduce benefits • Medicare Advantage reduction • $136 billion between 2010 and 2019 (2.7%)

28. Option: Change the Tax Treatment of Employer-Sponsored Health Insurance

29. Workers Pay for ESHI • Workers pay for health insurance in the form of reduced levels of other compensation More Health Insurance Lower Wages Expensive

30. ESHI Isn’t Taxed • Shift compensation from taxed wages to untaxed ESHI • This “tax exclusion” resulted in “tax expenditure” of $208.6 billion in 2006.* • Suppose we ended this special tax treatment. *Source: Seldon & Gray (2006).

31. Ending the Tax Exclusion … • Employer-based spending on health insurance would be reduced by $200,000 million per year • ESHI premiums would be reduced by $1,640 • 18.5% reduction • 11 million newly uninsured Source: Gruber, “The Tax Exclusion for Employer-Sponsored Health Insurance,” NBER 15766 (February 2010)

32. Key Points - 1 • Many of the proposals for change simply aren’t going to bend the cost curve • They are certainly not going to make a dent in 10 years.

33. Key Points - 2 • Selective contracting provides evidence of reducing costs, perhaps by as much as 15% • …but it means a return to narrow panel provider networks and substantial squeezing of providers.

34. Key Point -3 • Consumer Directed Health Care models can reduce costs by increasing consumer awareness but only by a limited amount • To be successful they need to be linked with selective contracting approaches to limit costs.

35. Key Point - 4 • “Medicare Reform,” meaning a reduction in benefits would have to be very substantial to have much of an impact.

36. Key Point - 5 • Changing the tax treatment of employer sponsored health insurance can have a dramatic effect on reducing insurance premiums, with health spending reduced by a smaller amount.

37. Finally… None of this is likely to be popular but if bending the cost curve is important, the really hard part of health care reform remains ahead of us.