What Can (and Should) States Do About Cost Control?

1
What Can (and Should) States Do About Cost
Control?

• Jonathan Gruber
• MIT and NBER

2
Scary Facts

• This year, U.S. spending 17.1 of GDP on health
  care
• By 2075, projected to rise to almost 40
• Also the largest and fastest growing element of
  state budgets
• We look particularly bad in international
  comparisons

3
Health Care Spending per Capita, 2006Adjusted
for Differences in Cost of Living
2005
3
Source OECD Health Data 2008, June 2008.
4
International Comparison of Spending on Health,
19802007
4
Source OECD Health Data 2009 (June 2009).
5
What is Driving Health Care Costs?

• Separate into three categories
• Prices
• Quantities
• Insurance Overhead

6
Driver I Prices

• The U.S. has been shown to pay much more per
  service than other nations

7
Drug Prices for 30 Most Commonly Prescribed
Drugs, 200607US is set at 1.0
Source IMS Health.
8
8
MRI Scan and Imaging Fees, 2009
Dollars
Source International Federation of Health Plans,
2009 Comparative Price Report.
9
Cost of Knee and Hip Prostheses to Providers,
2004GDP Adjusted, US
Dollars
Knee Replacements
Hip Replacements
9
Source McKinsey Company, Accounting for the
Cost of Health Care in the United States, 2007.
10
Driver II Quantities

• U.S. consumers do not have more contacts with the
  health care system

11
Average Annual Number of Physician Visits per
Capita, 2007
2006 2005
11
Source OECD Health Data 2009 (June 2009).
12
Hospital Discharges per 1,000 Population, 2007
2006
12
Source OECD Health Data 2009 (June 2009).
13
Driver II Quantities

• What differs is how much is done to us when we
  have those contacts

14
Hospital Spending per Discharge, 2006Adjusted
for Differences in Cost of Living
2005 2004
14
Source OECD Health Data 2008, June 2008.
15
Spending on Basic Medical and Diagnostic
Services,per Capita in 2006Adjusted for
Differences in Cost of Living
2005
Source OECD Health Data 2008, June 2008.
16
Driver II Quantities

• Striking area variations Guwande article
• McAllen vs. El Paso
• 50 more specialists visits
• 2/3 more likely to see 10 specialists over 6 mo.
• 1/5 to 2/3 more gallbladder operations, knee
  replacements, breast biopsies, and bladder scopes
• 2-3 times as many pacemakers, implantable
  defribrillators, cardiac bypass
• 200 more nerve studies for carpel tunnel

17
Driver III Insurance

• Costs driven also by insurance system
• Admin costs are higher but not that much higher

18
Exhibit 2. Percentage of National Health
ExpendituresSpent on Insurance Administration,
2005
Net costs of health insurance administration as
percent of national health expenditures
a 2004 b 1999 Includes claims
administration, underwriting, marketing, profits,
and other administrative costs based on premiums
minus claims expenses for private
insurance. Data OECD Health Data 2007, Version
10/2007. Source Commonwealth Fund Commission on
a High Performance Health System, Why Not the
Best? Results from the National Scorecard on U.S.
Health System Performance, 2008 (New York The
Commonwealth Fund, July 2008).
From How Health Care Reform Can Lower the Costs
of Insurance Administration
http//www.commonwealthfund.org/Content/Publicatio
ns/Issue-Briefs/2009/Jul/How-Health-Care-Reform-Ca
n-Lower-the-Costs-of-Insurance-Administration.aspx

19
Driver III Insurance

• Insurers
• legitimate administration
• illegitimate administration
• Profit
• Brokers
• But these are all level reductions, not growth
  reductions dont address long run problem

20
PPACA and Costs

• Reduce insurance costs through competitive
  exchanges
• Reduce provider prices through independent
  commission
• Reduce demand through Cadillac tax
• Experiment with comparative effectiveness
  delivery system reform
• Impacts uncertain

21
So What Can States Do?

• States have a number of avenues both working
  within and beyond PPACA
• NOT a comprehensive list, but some examples of
  possible state action
• General principle let competition work where it
  is most likely to succeed (insurance markets?)
• But move to regulation where it doesnt (provider
  markets?)

22
Insurance Markets

• Insurance markets with an exchange should be
  competitive
• But states can ensure maximum competition within
  exchange
• Selective contracting
• States can add value as negotiators
• Organizing choice
• Too much/disorganized choice can make shopping
  less effective
• Evidence from Part D
• Limits on plan design but not insurer variety
• Providing information
• Make choices as transparent as possible for
  consumers prices, benefits, provider network
• Make broker costs transparent
• move outside of prices

23
Insurance Markets

• States can act more aggressively as well
• Encouraging entry
• Can be hard for insurers to break into heavily
  regulated markets
• MA Celtic Care
• Public option
• Sustinet in CT
• Competitive bidding in Medicaid
• MA experience with Comm Care

24
Provider Price Regulation?

• Regulate prices only if market failure
• Health care markets may have aspects of natural
  monopoly
• Geographic
• Reputational
• Much more scope for market failures than in
  insurance markets

25
Provider Price Regulation?

• First step more information on costs and quality
• Use regulatory power to gather disseminate data
• Show consumers that more expensive isnt
  necessarily better
• Second step promote tiering in insurance design
  through exchange
• Preferable treatment of tiered plans
• Try to use the discipline of the market to punish
  overpriced providers
• Smart tiering commodify services which are of
  equal quality at multiple providers

26
Provider Price Regulation

• Third step regulation of provider prices back
  to the future?
• Want flexible regulation to take advantage of
  competition where possible
• Use those competitive markets to set benchmarks
  for others
• reference pricing to most competitive markets

27
Systems Reform

• Systems reform sounds good in theory hard to
  know what to do in practice
• Little concrete evidence on what works
• Need experimentation to learn what works
• DONT want to mandate systems reforms before we
  know what actually works
• E.g. ACOs may contradict desire for competitive
  solution to pricing problems by creating
  monopolies

28
Systems Reform

• Public Option provides a natural framework for
  such experimentation
• State can set the rules and assess how it
  performs relative to traditional insurance
• At a minimum can do state employees/Medicaid
• Huge value to experimentation
• Only way to learn which elements actually work
• But only valuable if follow up with careful
  evaluation

29
Systems Reform

• But remember Uwe Reinhardts law
• Health care costs Health care income!
• So need to build the case for systems reform
• First need to show that alternatives have failed
• Thats part of why you start with markets
• Then need public buy in
• Consumer skin in the game, both politically and
  financially