Healthcare Cost A Crash Course

1
Healthcare CostA Crash Course

• Dow Briggs, MD
• October 24, 2006

2
Session Objectives

• Stress the importance of considering cost in
  healthcare
• Identify overall cost trends
• Examine some specific areas of cost
• Discuss some current cost strategies
• Stimulate thought and hopefully new ideas on
  healthcare cost

3
Overview

• Costs, premiums increasing 14-18 /year
• Employers/employees are unable to afford rising
  costs
• Number of uninsured are increasing
• Federal budget deficit threatens Medicare state
  budgets tight
• Quality issues concerning
• Inability of normal processes to be effective

4
Medical Cost Trends

• Healthcare Cost Trends General Issues
• Hospital Cost Trends
• Physician Cost Trends
• Pharmaceutical Cost Trends
• Technology Cost Trends

Its getting increasingly harder to ignore the
elephant in the room
5
Rising Medical Costs

• National problem with significant local effects.
• Cost growth curves are felt to be unsustainable.
• Failure of existing cost control measures.
• Government unable to address this politically
  volatile issue.
• Uninsured population rising
• Short term solutions are becoming increasingly
  painful for all

6
Healthcare Cost Trends
Health is the largest sector of the U.S. economy.
Components of GDP, 2004
Percent of GDP
ProjectedSource Bureau of Economic Analysis,
2003 Centers for Medicare and Medicaid Services,
2003b
7
Healthcare Cost Trends
National health expenditures are accelerating
again
National Health Expenditures
Average Annual Percentage Change
NHE (per Capita)
Source National Center for Health Statistics.
Health, United States, 2001
8
Healthcare Cost Trends Overview

• Health expenditures per person rose 24 between
  2000 and 2003
• More than half of the 2004 increase in private
  insurance spending was driven by hospital costs,
  especially for outpatient care
• Prescription drug expenditures are another major
  driver of healthcare costs. They are projected
  to compose a growing portion of total costs over
  the next decade.
• The growth in healthcare expenditures continues
  to outpace the rest of the economy. By 2012,
  expenditures are expected to double, with an
  estimated 18 of the domestic economy devoted to
  healthcare

9
Healthcare Cost Trends
Health expenditures per person rose 24 between
2000 and 2003.
National Health Expenditures Per Capita
NHE per Capita
ProjectedSource Centers for Medicare and
Medicaid Services, 2003a
10
Healthcare Cost Trends
Health expenditures are expected to double in the
next decade, outstripping growth in the rest of
the domestic economy.
Projected National Health Expenditures and
Percent of GDP
Percent of GDP
NHE in Billions
Source Centers for Medicare and Medicaid
Services, 2003b
11
Evidence of Further Increasing Problems

• New clinical procedures and technologies that
  improve quality and outcomes but increase cost
• An emerging genomics and biotechnology revolution
• Under-funded core providers - primary care,
  hospitals, long term care, etc.
• Shortage of nurses and other caregivers
• Medical malpractice insurance crisis
• Under-investment in information technology and
  EMR
• Under-investment in quality (chasm)

12
Healthcare Cost Trends
Americans spend much more per person on
healthcare than people in other countries.
Health Spending per Capita in 2002(in U.S.
dollars adjusted for purchasing power parity)
Percent of GDP
1998 or 1990-1998Source Organization for
Economic Cooperation and Development (OECD),
2001, as reported by Reinhardt et al., 2002
13
Healthcare Cost Trends
Hospital and physician services each account for
almost one third of private healthcare spending.
They are followed by prescription drugs and
health plan administrative costs.
Private Insurance Healthcare Dollar, 2004
31Hospital Care
30PhysicianServices
14PrescriptionDrugs
11Admin
10OtherMedical Services
3NursingHome andHome Health
1DurableMedicalProducts
Source Adapted from Centers for Medicare and
Medicaid Services, 2002
14
Healthcare Cost Trends-Uninsured
Healthcare for the uninsured also adds to overall
costs. In 2003, uncompensated healthcare for
uninsured people cost over 36 billion.
Estimated Cost of Uncompensated Care in 2003 by
Type of Health Care Providers
Some of these costs are offset by funds such as
federal payments to hospitals with a
disproportionate share of uninsured
patients.Includes Veterans Administration and
Indian Health Service Hospitals and other
community health providers.Source Hadley and
Holahan, 2003
15
Healthcare Cost Trends-Uninsured
Inpatient hospital care for uninsured patients is
costly.

• 5.6 of all hospital discharges in the U.S.
  close to 1.9 million are for uninsured
  patients.
• These hospitalizations cost 9.7 billion to 11.6
  billion, or 5.1 of all hospital inpatient costs.
• Teaching hospitals account for 23 of the
  hospitalizations among the uninsured and 33 of
  the associated costs.
• Admissions of uninsured patients for ambulatory
  care sensitive conditions like asthma and
  diabetes many of which can be prevented through
  good outpatient care cost 1.2 billion to 1.4
  billion per year

Source Siegrist, 2003, projected from hospital
discharge data from 10 states for 2000/2001
16
Healthcare Cost Trends-Fraud
Healthcare fraud also drives up healthcare costs.

• Estimates of the amount of fraud are substantial.
• In 2002, the Office of the Inspector General in
  the federal Department of Health and Human
  Services estimated that 6.3 of the 191.8
  billion it paid in healthcare claims or 12.1
  billion should not have been reimbursed because
  of erroneous billing or payment, inadequate
  documentation to support the claim or outright
  fraud.
• The National Healthcare Anti-Fraud Association
  estimates that at least 3 of U.S. expenditures
  on healthcare - 39-50 billion per year are
  lost to fraud.

Source National Health Care Anti-Fraud
Association, 2002
17
Medical Cost Trends

• Healthcare Cost Trends
• Hospital Cost Trends
• Physician Cost Trends
• Pharmaceutical Cost Trends
• Technology Cost Trends

18
Spending Growth Continues To Be Dominated by
Hospital Services
Percentage of Yearly Medical Spending Increase
Source Milliman USA Health Cost Index, in
Strunk, Gabel and Ginsburg, 2001,Center for
Studying Health System Change 2002
19
Hospital Cost Trends
Hospital costs are the largest component of
healthcare expenditures. Their growth accounted
for half of the increase in healthcare costs
between 2002-2004.
Contributions to Private Insurance Spending Growth
Physician
Hospital Outpatient
28
37
Prescription Drugs
21
14
Hospital Inpatient
Source Milliman USA Health Cost Index, as
reported by Strunk, Ginsburg and Gabel, 2002
20
Hospital Cost Trends
After declining during the mid-1990s, inpatient
hospital costs are now rising 6 to 7 per year.
Inpatient Spending Growth per Capita, 1991-2004
Percent Change
21
Factors Influencing Hospital Spending(Annual
Percentage Change)
Both Price and Utilization Increases Account for
Hospital Spending Increases
(Annual Percentage Change)
Souce Strunk Ginsbug, Health Affairs June 2003
22
Hospital Admissions Growing!!
Admissions In Hospitals
Source AHA Hospital Statistics 2004
23
Hospital Inpatient Average Length of Stay Levels
Off
Source AHA hospital statistics 1998, 2003
24
Hospital Cost Trends
There are large variations in the cost of a
hospital stay across the United States.
Inpatient Expenditures per Hospital Admission,
1998-2003Percentage Above or Below the US
Average
-23(VT)
-15
-10
-33
-28
-5
-14
-7 (NH)
-28
2 (MA)
-7
-27
1
7
-4 (RI)
-12
3 (CT)
18
-22
-9
52 (NJ)
34
5
16
-15
-3 (DE)
-11
11
45
-31
24 (DC)
19
0
-3
-9
-38 (MD)
-14
-4
-2
20
lt-20
-8
0
13
-6 to -20
4
5
-3
12
-5 to 5 (0US average)
12
12
6 to 20
29
gt20
40
Based on the experience of a large, nationally
representative group health plan and adjusted
for Diagnosis-Related Groupings (DRGs)Source
Hay, 2002
25
Hospital Cost Trends
Hospital payrolls, which make up a significant
portion of hospital costs, are rising rapidly.
Annual Change in Hospital Payroll, 1991-2002
On average, nursing costs represent 44 of a
hospitals direct cost.
Annual Percent Change
Data through June 2002 compared with
corresponding months in 2001.
Source Bureau of Labor Statistics, U.S.
Department of Labor, as reported in Strunk,
Ginsburg and Gabel, 2002 Kane and Siegrist, 2002.
26
Hospital Cost Trends
These costs will escalate as the nursing shortage
worsens.
Forecast of Total RN FTEs vs. Hospital
Requirements, 2001-2020
Implication of Nursing Shortage

• Hospitals spent 71M in 2001 using
  agency/travelling nurses to fill vacant slots
  (AHA 2002).
• Each 1 increase in the gap between registered
  nurse demand and supply leads to a 0.5 to 1
  increase in hospital inpatient expenditures per
  capita (Hay, 2002).

Demand
Shortage of 434,000 Nurses in 2020
Supply
Number of Nurses in Thousands
Full time equivalent.Source U.S. Census Bureau
and Health Resources and Services Administration,
as reported in The Lewin Group, 2002a.
27
Hospital Cost Trends Overview
Key Inpatient and Outpatient Cost Points

• Rising inpatient costs are due in large part to
  increased use of more expensive technology
  higher labor costs driven by the growing nursing
  shortage hospital consolidation and increasing
  costs per admission.
• Rapidly rising outpatient costs are no longer
  being partially offset by declining inpatient
  costs, as they were in the mid-1990s. The number
  of outpatient visits continues to grow.
• There are large geographic variations in hospital
  costs and in their rates of increase.

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Medical Cost Trends

• Healthcare Cost Trends
• Hospital Cost Trends
• Outpatient and Physician Cost Trends
• Pharmaceutical Cost Trends
• Technology Cost Trends

29
Outpatient Visits in Hospitals Increases Even
Faster
Outpatient Visits In Hospitals
Source AHA at Modern Healthcare December 23,
2002
30
Hospital Cost Trends Outpatient Services
Outpatient services were the fastest growing
component of privately funded healthcare costs in
2001 and 2003. One factor is the continuously
rising number of outpatient visits.
Number of Outpatient Visits per 1,000 Population,
1995-2003
Number of Visits
Source American Hospital Association, 2003
31
Key Physician Cost Trends

• The increase in the number of physicians over the
  last four decades has been driven primarily by
  specialists.
• Specialist charges average more than twice as
  much as primary care physician charges, and they
  are growing at a much faster pace.
• Patient visits to specialists have increased,
  especially among older adults.
• The primary controllable driver of physician
  costs are physician market structure and medical
  technology.

32
Physician Cost Trends
Physician supply has increased for the past four
decades
Number of Non-federal Physicians per 100,000
Civilian Population
Number of Physicians(per 100,000 Civilian
Population)
Source American Medical Association, Physician
Characteristics and Distribution in the U.S., 2001
33
Physician Cost Trends
The physician supply has increased significantly
over the past three decades, driven largely by
rapid growth in the number of specialists.
Number of Physicians per 1,000 Population
TotalActive Physicians
Number of Physicians per 1,000
PCP / Specialist Gap
ActivePrimary Care Physicians
Primary care includes general and family
practice, general internal medicine, general
pediatrics and obstetrics and gynecology.
Source American Medical Association, 2000
34
Physician Cost Trends
Specialist charges are more than two times higher
than primary care physician charges, and they are
growing at a much faster rate.
Median Gross Charges
CAGR
5.4
Specialists
Charges in Thousands
3.4
Primary Care Physicians
Excludes technical charges.Compound Annual
Growth Rate.
Source Medical Group Management Association,
1997, 2001
35
Physician Cost Trends
Seniors (65) make twice as many ambulatory care
visits as the average person.
Ambulatory Care Visits per Capita by Age, 2003
Number of Visits
All Ages3.7
Source National Center for Health Statistics,
2002
36
Physician Cost Trends
The rapid growth in the number of jury awards is
driving up the cost of medical malpractice
insurance.
Number of Physician Medical Liability Payment
Reports and Median Compensatory Jury Awards,
1996-2000
Amount in Thousands
Number in Thousands
Source Number of Medical Liability Payment
Reports National Practioner Databank, Annual
Report 2000. Median Compensatory Jury Awards
Jury Verdict Research, Medical Malpractice
Verdicts, Settlements and Statistical Analysis,
2002, as reported by The Lewin Group, 2002b
37
Medical Cost Trends

• Healthcare Cost Trends
• Hospital Cost Trends
• Physician Cost Trends
• Pharmaceutical Cost Trends
• Technology Cost Trends

38
Pharmaceutical Cost Trends
Pharmacy costs have risen rapidly in recent years
and are expected to account for an increasing
share of the healthcare dollar.
Pharmacy Costs and Growth Rate
Percent of National Health Expenditures
Costs in Billions
ProjectedSource Centers for Medicare and
Medicaid Services, 2003a
39
Pharmaceutical Cost Trends
People are using more drugs each year.
Prescriptions per Capita and Total Prescriptions
Dispensed
Drivers of Drug Utilization Include

• Promotional spending
• New medical guidelines
• May call for more aggressive treatment of disease
• Outpatient setting
• Drugs covered under pharmacy plan insteadof
  medical plan
• Increased compliance
• More convenientdosage, increased consumer
  awareness and fewer side effects
• Off-label usage

10.9
9.9
9.0
8.4
7.8
Number of Prescriptions per Capita
Total Number of Prescriptions Dispensed (in
Billions)
Source Adapted from National Institute for
Health Care Management, 2002 U.S. Census Bureau,
2002
40
Key Pharmaceutical Cost Trends

• Over the past 20 years, there has been a
  substantial and steady increase in
• The share of national health expenditures
  attributed to pharmaceutical costs and
• Total pharmaceutical spending for public and
  private payers.
• Three factors drive increases in prescription
  drug costs increased utilization, price
  inflation and higher-cost drugs.
• Promotional spending, especially
  direct-to-consumer advertising, has propelled
  sales for pharmaceutical companies.
• Increasing research and development budgets will
  continue to feed expensive new drugs into the
  market.
• Pharmaceuticals continue to be the most
  profitable healthcare industry.
• The increased use of generics drugs provides an
  opportunity for slowing the growth in costs.

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Pharmaceutical Cost Trends
The increase in pharmacy costs is hitting all
market segments.
Pharmacy Spending by Payer
Total
Pharmacy Costs in Billions
Private Health Insurance
Out-of-Pocket Payments
Total Public Payments
Projected
Source Centers for Medicare and Medicaid
Services, 2003c
42
Medical Cost Trends

• Healthcare Cost Trends
• Hospital Cost Trends
• Physician Cost Trends
• Pharmaceutical Cost Trends
• Technology Cost Trends

43
Key Technology Cost Trends

• Technology is a major driver of healthcare costs.
  Major force in advancement in medicine .
• Technology and treatment patterns account for
  about 18 of the variation in hospital inpatient
  and outpatient costs.
• Technology encompasses a broad range of
  innovations, from new diagnostic tests using
  magnetic resonance imaging (MRI), PET, or single
  photon-computed tomography (SPECT) to new drugs
  and new surgical procedures
• New healthcare technology often increases
  healthcare costs, even when it lowers the unit
  cost of a service.
• Technology will undoubtedly drive up healthcare
  costs for the foreseeable future.

44
Technology Cost Trends
During the 1990s, technology accounted for an
estimated 12 to 39 of healthcare spending
growth. It is projected to account for 25 to
33 of the growth by 2010.
CMS Estimated Percentage Contribution of
Technology to Growth in Personal Healthcare
Spending
Source Centers for Medicare and Medicare
Services as reported by Project Hope, 2001
45
Technology Cost Trends
New technologies are developed and used at a
rapid rate.
New Drug Application Approvals and Significant
Medical Device Breakthroughs, 1997-2003
200
150
Number Approved by FDA
100
50
Source The Lewin Group for the American Hospital
Association, 2002
46
What Does this All Mean?

• Patient
• More out of pocket expense
• More decision making about care
• Employer
• Metal will be made in other countries
• Plants will be moved to cheaper locations
• Labor will be exported off shore
• More unemployed hence uninsured

47
Who Cares?
48
Quality Concerns
Institute of Medicine Report notes tens of
thousands of unnecessary deaths. Medicare
enrollees in higher spending regions receive more
care than those in lower spending regions but do
not have better health outcomes or satisfaction
with care. Fisher, E. et al Ann Internal
Medicine. 138(4). February 18, 2003 pp
351-351 Our results suggest that, despite
implementation challenges, purchaser and payer
initaitives that encourage consumers to seek
lower cost inpatient care without sacrificing
clinical quality are worth pursuing.
Siegrist, B. et al Am J Managed Care. 9(SP1).
June 2003. pp. SP43
49
Utilization Strategies

• Benefit Design employer choices
• less coverage
• higher deductibles
• Shift cost to employees skin in the game
• Consumer Directed Healthcare
• Transparency cost, quality
• Consumer report medicine

50
Employers Shift Burden to Employees Likelihood
of Large California Employersmaking Benefits
Changes
Note 84 of Patients already face 10 or higher
Copays
Source Kaiser Family Foundation California
Employer Health Benefits Survey
51
Utilization Strategies

• Manage the Process
• Depress Supply limit providers
• Reduce Incentives of Providers
• Encourage Competition
• Physician risk
• HMO influence- return of managed care

52
Other Approaches to Lowering Costs

• Control Access
• CON Legislation
• Limit benefits
• Correct reimbursement
• Outcomes based credentialing/reimbursement
• Medical necessity guidelines driven by evidence
  based guidelines
• Reimbursement strategies that are marginally
  profitable to users.
• Physician incentive strategies

53
Physician Incentive Models

• Quality bonuses
• Compensation at risk
• Performance fee schedules
• Quality grants
• Reimbursement for care planning
• Variable cost sharing for patients
• Performance profiling
• Publicized performance
• Technical assistance for quality improvement
• Reducing administrative requirements

54
Pay for Performance
Quality

• Must align incentives currently misaligned
• Pay for performance vs. Pay for compliance
• High quality only or winner and losers
• Patient centered plan is key
• Might consider paying for value
• Value quality/cost
• Partnering for Value

PATIENT
Cost
Access
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Where its all going.

• Total health care costs are rising, and tough to
  control
• Unsustainable medical cost trends
• Serious economic consequences will affect doctors
• Health care cost will moderate over time ,but
  question is what will be lost?
• Issue must be addressed today
• This will not be a fun and easy process
• However, remember that there is

56
Opportunity all around us

• Advances in medicine in the last century are a
  sign we can improve the current system
• Ingenuity is the key to longevity
• Quality patient care is the core principle for
  success
• Be willing to look and to change
• Dont let perfection be the enemy of good

57
(No Transcript)
58
Questions?
59
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60
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