Bending the cost curve

Tags: academy update, health care costs, reform, health care, policy

Now comes the hard part

By Tom Banning
TAFP Chief Executive Officer/Executive Vice President

If one accepts the premise that politics drives health care policy, then it would follow that flawed politics produces flawed policy. Those hoping for a vigorous and thoughtful debate on health care reform—what works and how to pay for it—are instead forced to settle for media theatrics and hyperbole that come dangerously close to the level of UFO conspiracies.

The town hall debacles and orchestrated lunacy during the August recess have dispelled any lingering hope that Congress can move away from the partisan bickering and sniping that has increasingly characterized what passes for debate in one of the world’s greatest deliberative bodies. Congressional leaders on both sides of the aisle, with the blessing and encouragement of their caucus’ political consultants, talk not in terms of medical economics and policy options for improving our health care system, but rather in calculated polling and focus-group-generated strategies designed to fire up their respective political base and confuse and scare the public to meet their own political objectives.

Yet, despite the admittedly dismal political prognosis, both Democrats and Republicans understand they must address the underlying, fundamental policy question vexing Congress: how to bend the health care cost curve. Health care costs and health insurance premiums continue to rise faster than inflation and are eating up an ever-larger share of employee compensation. In turn, those ballooning costs are consuming an increasing share of state and federal budgets. At the same time, millions of people who need health insurance are unable to find affordable insurance options and are priced out of the market.

Whether or not Congress succeeds in passing health care reform, the ability of any reforms to significantly bend the cost curve will face a series of economic paradoxes peculiar to the health care marketplace that work in direct contradiction to conventional market behaviors and undermine legislative and regulatory approaches to containing costs.

  • The price inelasticity paradox: People don’t choose to be sick like they choose to buy a car or a pair of shoes. Demand for health care is relatively price inelastic, meaning a high price won’t necessarily keep them from seeking care, though they may delay care until they can’t wait any longer, triggering greater cost for more expensive care. When you’re sick, you’ll hock the family farm to get care. That’s partially why medical debt is the leading cause of personal bankruptcies.
  • The inverse supply paradox: Because demand is price inelastic, when supply is expanded through additional health care providers, diagnostics or therapies, demand expands with supply. Patients will want all there is; they won’t settle for a mere X-ray if they can get an MRI or, better yet, a CT scan if it’s available. Medical services are cost-push inflationary, meaning most of the spike in health care expenditures comes from increased utilization of services, not price. In fact, physician fees have been relatively flat or declining for years, yet costs still escalate—a consequence of rising demand and increased utilization.
  • The price transparency paradox: Although patients can now access an increasing amount of health care pricing and scientific information, the bulk of it is useless to most consumers. As Princeton’s Uwe Reinhardt famously warns, you can’t rely on caveat emptor to police the market, because the emptor doesn’t know how to caveat. Patients lack the sophistication necessary to know what health care they should or should not purchase. Cheap isn’t always best, and imposing evidence-based standards, however clinically sound, may well increase costs. According to a Rand Corporation study last year, patient and payer expenditures are effective only about half the time. One could also observe the considerable sums wasted on quack- and self-cures, despite an abundance of evidence against those choices.
  • The efficiency paradox: This is what economists call Baumol’s law, named for the economist who codified the phenomenon. Simply stated, you can’t impose efficiencies on medical productivity to save money because of the personal, handicraft nature of professional services. No matter the technological advances in medicine, it still must be applied by hand, one patient at a time. Medical productivity has an organic resistance to scalability and its related efficiencies.
  • The power curve paradox: This paradox occurs when most of the resources are consumed by a small portion of the grid. There isn’t a health care analyst on the planet who can’t cite the statistics. Twenty percent of patients account for 80 percent of health care expenditures. These are your trauma victims and your infirm, disabled, chronic, palliative and end-of-life patients.

In a commentary in the Journal of the American Medical Association, Ezekiel Emmanuel, M.D., Ph.D., then with the National Institutes of Health, argued that the problems of the uninsured and lack of coverage are symptoms of high health care costs. He called this the “cost-coverage trade-off” and concluded that a strong relationship exists between health care cost and coverage, “higher state health care costs mean worse coverage, and as costs increase, the rate of uninsured individuals also increases.” Therefore any attempt to expand insurance coverage without addressing the underlying problem of health care costs will be fleeting. He wrote:

Higher health care costs drive up insurance premiums, which may induce employers and the self-insured to eliminate coverage. Moreover, as workers are forced to assume a higher fraction of their premiums, more of them many not choose health insurance even when offered. In addition, higher health care costs drive up the cost of Medicaid and other need-based government health programs, inducing states to constrict eligibility requirements.

Despite efforts to contain health care costs, effective solutions remain elusive. In a recent assessment of cost containment strategies, the Kaiser Foundation has drawn a stark conclusion:

Current proposals to restrain health care costs—such as incorporating better information technology into health care, paying providers based on quality and increasing out-of-pocket costs for health care consumers—may lead to efficiency and quality gains, but none would appear to be of a scale to have any meaningful impact on the overall cost picture. And these cost-control measures would generally provide only one-time savings.

According to Emanuel:

Reducing waste from insurance underwriting, sales and marketing costs is valuable but constitutes a one-time savings. Furthermore, because these costs are in large part a consequence of selling insurance individually to more than 6 million businesses, they can be achieved only by completely revamping employer-based insurance.

Reforming America’s broken health care delivery system will be a daunting task and it will require more than any single act of Congress. We are at the end of the beginning, not the beginning of the end of health care reform. Whatever measures Congress passes, implementing them will take years, if not a decade. In the meantime Congress will tweak, fine-tune or completely overhaul those elements that are working or more importantly, those that are not.

The medical literature is clear; the way to rein in costs is to invest in primary care to defragment our inefficient and costly health care system so patients receive the right care at the right time in the right setting. Revitalizing our primary care infrastructure will require payment reform and significant investment in our primary care workforce. Absent reforms that re-establish family medicine and primary care as the foundation of America’s health system, efforts to bend the cost curve will be futile.

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