Medicare Growth Slows

Today’s Managing Health Care Costs Indicator is $69 billion

Click on image to enlarge. Source 

The New England Journal of Medicine reported last week that the Congressional Budget Office lowered its estimate of Medicare costs over the next decade by $69 billion in January.   The trend rate for Medicare is estimated to be below changes in GDP per capita for the next decade – which is unprecedented since Medicare’s inception.

Why?

For starters, authors White and Ginsburg are using costs per capita – thereby adjusting for Medicare’s growth in enrollment with aging of the baby boomers.  That’s the only fair comparison –but there will still be some who will point to higher overall costs.  In fact, with a smaller base of workers paying for most of Medicare, the total cost is important, too.

There are some important forces which can help lower Medicare costs during this decade.

1)      Baby boomers are accustomed to (or perhaps resigned to) some elements of managed care, and are less likely to resent some restrictions on the care that they receive. It’s not as difficult to accept prior authorization for high cost imaging when you’ve been subject to this for over a decade!

2)      The PCORI ( Patient Centered Outcome Research Institute) has stated that it will focus on the triple aim:  better quality, better patient experience, and lower cost.  This can provide evidence that will increase the hurdle for incremental innovations with high costs and minimal clinical improvement.   3/14 ADDENDUM:  PCORI is prohibited from considering cost. It's the CMS Innovation Center that is focused on the triple aim.  See comment from Nathan Punwani below.  
3)      The Independent Payment Advisory Board (IPAB) will make recommendations about how to lower costs if spending targets are exceeded.  The IPAB will force Congress’ hand – it must vote up or down recommendations in their entirety, much like military base closings.  A bill to abolish the IPAB is close to House passage, though, and some of the Board’s 2012 funding was rescinded.

4)      Increasingly effective anti-fraud efforts, including better use of software to detect early fraud patterns before millions of dollars in claims are “out the door.” 

5)      Increasing out of pocket costs for those with employer-sponsored health insurance promotes disruptive innovation, which can lower the costs of health care for all, including those on Medicare.

It’s reassuring that as the Medicare growth rate has tumbled the rate of growth of spending in commercial (employer-sponsored) health plans has fallen as well.  Many worry that any dollar saved in Medicare or Medicare is “shifted” to nonpublic payers. That doesn’t seem to be true at the moment.

There are a series of market forces, however,  that threaten to make Medicare costs escalate beyond current projections

1)      Move toward increasingly individualized care.  While some advocates point out that genetic tests can prevent giving an expensive toxic medicine to a patient who won’t benefit, individualized medicine is bound to increase costs because the tests will be done on a large group of patients, including those who might have otherwise gotten little or no care.  Tests which can prevent the use of a drug that will cost tens of thousands of dollars will have a high market value.

2)      “The new 55.”  Aging baby boomers increasingly expect high levels of physical activity into their 70s, 80s, 90s and beyond. Stanford physician and author Walter Bortz continues to run marathons into his 80s, and has written that with the right diet and exercise humans can live to be 120.  We’ll need to be doing total joint replacements for people who a generation ago would have accepted loss of mobility (or even died).  This is a good thing – but it won’t be cheap!

3)      Market consolidation.  Hospitals increasingly “own” their physician staffs, and there has been huge consolidation in the health care market space.   Provider competition is more likely to lower overall costs, and that might be diminishing

4)      Decreasing undertreatment.   Most health care is at best cost –effective, not cost-saving.  Many interventions that are now underutilized (colonoscopies for instance) are likely to increase over the next decade, especially as electronic medical records with robust patient portals take hold.   Again, this is good, but these cost-effective interventions will give us extra quality-adjusted life years, but at a significant price.

5)      Increasing adherence to medications.   While some suggest that we can save billions if patients just listen to their physicians’ advice and take their medicines, most medicines are cost-effective, not cost-saving.  See note above. This is great – but we’ll get QALYs for a price.

It’s hard to predict the future, at least prospectively, and it’s heartening that experts see an end to the rapid cost spiral in Medicare.  I think achieving these projections will require substantial effort.  Sara Kliff of Wonkblog has pointed out that if these projections are right we won’t need the IPAB.  I wouldn’t bet on that.

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Variation: Study Suggests Cost Based on Illness More than Delivery System

Today’s Managing Health Care Costs Quote:

“Insurance is expensive because it's paying for medical care, and it won't be affordable unless the medical care it's paying for becomes affordable.”

Ezra Klein  , January 28, 2011

There’s another volley in the ongoing academic food fight about how much provider variation affects variation in health care costs, and how much of variation is about how sick patients are.

The Center for the Study of Health System Change  has just circularized an article published last week in Health Services Research  which looked at a year of claims data from 1.6 million Medicare beneficiaries in communities where the Community Tracking Survey collected independent information about providers.  High cost beneficiaries cost $48,000, while low cost beneficiaries (top and bottom quintile) cost $7000. 

The high cost beneficiaries were older, more likely to be eligible for both Medicare and Medicaid, and had more diseases.    They were more likely to get health care in multiple census districts, and more likely to have a specialist as their usual source of care.  However, they were not more likely to live in areas with higher hospital, physician or specialist supply.

This is a complicated study of Medicare beneficiaries only, and includes scads of statistical manipulation and adjustments.  It’s not proof that supply has no impact on resource cost. However, I believe this is another indication that we can’t expect to solve the health care cost crisis by profiling providers and controlling capital expense alone. 

We’ll need to make real and difficult change in the actual delivery of care to genuinely sick people to get the cost savings we need.    

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Provider Clout

There have been a few excellent articles and studies on provider consolidation – and how much this impacts the overall costs of health care costs.

Kaiser Health News and NPR aired a 7 minute piece on Saturday demonstrating the impact of Sutter Health System in northern California.  It’s almost impossible for major insurance companies to sell policies for products that don’t include Sutter, which receives reimbursement that is now 37% higher than other providers in the area.   Sutter has a profit margin of over 17% - far out of line with most profit or nonprofit hospital systems across the country.  An insurance broker demonstrated that a small business with 20 employees could save $120,000 per year by purchasing health insurance that did not include Sutter.  But he can find few takers for this type of limited network.

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The Center for the Study of Health System Change published a study of 8 markets (including northern and southern California) showing that four large national health insurers pay hugely variable amounts for the health care they provide to their members.  In Los Angeles, the average commercial (employer-sponsored) health plan pays 118% of Medicare for inpatient care.  However, the 25%ile hospital receives 84% of Medicare payment, the 75%ile hospital receives 168% of Medicare, and the highest paid hospital receives over four times Medicare payment. 

The Boston Globe  noted last week that Massachusetts Attorney General Martha Coakley has promised to revisit the issue of provider market clout, worrying that proposed payment reform is not enough.  However, as the Center for Health System Change noted, once there are widely different allowed charges among facilities, it will be very hard indeed to roll these back.

The New York Times published an article today noting increasing consolidation of hospitals, ambulatory care centers and physicians.  The article outlines the fear that as providers establish accountable care organizations to service Medicare under health care reform, their influence will grow even larger, as will their ability to extract high prices.

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OK – that’s the doom and gloom.  In our class last week, we saw a graphic showing that hospitals have MUCH less consolidation (at least according the US census bureau) than health insurers.  Physicians have less consolidation than just about everyone except for florists.  So- this means there is no problem, right?

Wrong!

Health care delivery is hyperlocal.    Sutter has very high prices and very high margins, and Sutter has high market penetration and importance in its limited geography. It doesn't matter that Sutter provides under 1% of all health care delivery in the US, while  United HealthCare is responsible for insuring 70 million Americans.  In Northern California, Sutter has far greater dominance than any health plan, and is able to use that to drive very high prices.  Limited or tiered networks can exert at least some downward pressure on these prices. 

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