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Cost Containment and the Patient Protection and Affordable Care Act


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Title: Cost Containment and the Patient Protection and Affordable Care Act

Cost Containment and the Patient Protection and
Affordable Care Act
On one hand
  • The legislation puts into place virtually every
    cost-control reform proposed by physicians,
    economists, and health policy experts.
  • Orszag Emanuel (2010)

On the other hand
  • "The job of figuring how to cover uninsured
    people used up all the political oxygen that was
    available. They didn't have the energy for
  • Alan Sager, quoted by McClatchy-Tribune News
    Service, April 1, 2010

Cost containment
  • Outline of todays class
  • The cost problem
  • Is PPACA the solution?
  • If not, how else might we contain costs?
  • What constraints does the law place on cost
    containment strategies?

Cost containment
  • Outline of todays class
  • The cost problem
  • Is PPACA the solution?
  • If not, how else might we contain costs?
  • What constraints does the law place on cost
    containment strategies?

The highest spending country
  • Health care spending in economically-advanced
  • US 7,290/capita 16 of GDP
  • Switzerland 61 of US 67 of US
  • Canada 53 of US 63 of US
  • Germany 49 of US 65 of US
  • Japan 35 of US 51 of US
  • New Zealand 34 of US 57 of US
  • OECD Health Data 2009 (2007 data except 2006 for

Total expenditure on health per capita (US PPP)
OECD, 2006
Total expenditure as GDP
OECD, 2006
The cost problem
  • What do we get for our money?

(No Transcript)
Infant mortality per 1,000 births
OECD, 2006
Quality of care
  • Breast cancer, 5-year survival rate
  • US-90.5, Canada-87.1, Japan-86.1,
    France-82.8, UK -77.9
  • Colon cancer, 5-year survival rate
  • Japan-67.3, US-65.5, Canada-60.7,
    France-57.1, UK-50.7
  • Asthma hospitalization rate (per 100,000 pop.)
  • US-120, UK-75, Japan-58, France-43, Canada-18
  • Diabetes hospitalization rate (per 100,000 pop.)
  • US-57, UK-32, Canada-23, Germany-14, Italy-11

Inadequate return on health care
  • US health system is less efficient than systems
  • Spain, France, Germany, Austria, Italy
  • UK, Denmark, Norway
  • Japan, China, Australia
  • Canada, Mexico, Colombia, Venezuela
  • Evans, et al. 2001
  • US patients treated in higher-cost communities
    have similar outcomes to US patients in
    lower-cost communities
  • Gawande 2009

Inadequate return on health care
  • Not because were less healthy

of pop. daily tobacco smokers
OECD, 2006
Alcohol consumption (liters per capita)
OECD, 2006
of pop. 65 years or older
OECD, 2006
of pop. 19 years or younger
OECD, 2006
Obesity rates
Overall effect of health status
  • Americans actually may suffer less from high-cost
    medical conditions than people in Western
    European countries
  • McKinsey Company study estimated that the
    United States may actually spend a little less
    than other countries because of lower disease
    prevalence (pages 23-24 of study)

Why are costs higher in the US?
Higher prices in US
  • Costs are higher in US in large part because
    prices for health care services are higher
  • On the buyer side, governments in single-payer
    systems can bargain more effectively than can US
    insurance companies with doctors, hospitals and
    pharmaceutical companies
  • On the seller side, hospital mergers have led to
    greater negotiating leverage with insurers
  • Peterson Burton, Congressional Research Service

Higher volume in US--greater use of surgery and
expensive diagnostic tests
  • More procedures to treat blocked coronary
    arteries (2 x OECD avg.), more knee replacements
    (1.5 x OCED avg.), and more cesarean sections
    (1.25 x OECD avg.)
  • Increase in outpatient surgery centers very
  • More MRI exams (gt 2 x OECD avg.) and more CT
    exams (gt 2 x OECD avg.)
  • High ratio of specialists to primary care
  • US patients more likely to be hospitalized for
    conditions preventable by good primary care
  • OECD Health Data (2009) Peterson Burton (2007)

Structural contributors to costs
  • Insurance gt Price-insensitive consumers
  • If treatment costs 100 and yields a value of
    75, it shouldnt be providedbut if the patient
    only pays 25 and receives the 75 value, it will
    be worth it to the patient
  • Americans pay more total dollars out of pocket,
    but we generally pay a smaller percentage of our
    health care costs out of pocket (i.e., through
    deductibles and co-payments) (premium payments
    are not included)
  • France-8, US-13, Germany-13, Canada-15,
    Japan-17, Switzerland-32
  • Peterson Burton 2007

Structural contributors to costs
  • Fee-for-service reimbursement gt
    Quality-insensitive physicians and hospitals
  • When physicians and hospitals are paid more to do
    more, regardless of outcome, theyll do more
  • Especially when they lose money on higher quality
    care (Urbina 2006)
  • Example of clinic that switched from salary to
    commission on fees generated and doctors
    scheduled more appointments and ordered more
    blood tests and x-ray
  • Hemenway 1990

Cost containment
  • Outline of todays class
  • The cost problem
  • Is PPACA the solution?
  • If not, how else might we contain costs?
  • What constraints does the law place on cost
    containment strategies?

PPACA and cost control
  • Many different provisions designed to contain
    costs (remember Orszag Emanuel quote)
  • Serious question whether all of the provisions
    really address the cost problem
  • PPACA doesnt take on the major drivers of higher
    costs other than to some extent through
    demonstration projects and Medicare reimbursement

Permanent reductions in Medicare reimbursement
rates ( 3401)
  • Applies to hospitals, nursing homes and other
  • Every year, payment rates are adjusted to reflect
    increases in the operating costs of health care
  • The increases have been calculated from a market
    basket of goods and services that the facilities
    purchase (with reductions for failure to file
    quality data and other technical adjustments)
  • Under PPACA, a productivity adjustment will be
    made based on economy-wide productivity gains
    (which are greater than in health care)there
    also will be a ten-year further reduction in the
    update percentage (0.10 to 0.75 percent per year)
  • Estimated savings 196 billion

Permanent reductions in Medicare reimbursement
rates ( 3401)
  • Note that PPACA provisions reflect a mix of
    policy and politicssee the annual reductions in
    update percentages
  • 2010 0.25 2015 0.20
  • 2011 0.25 2016 0.20
  • 2012 0.10 2017 0.75
  • 2013 0.10 2018 0.75
  • 2014 0.30 2019 0.75
  • After 2019, IPAB recommendations due to kick in

Reduction in payment rates forMedicare Advantage
program ( 3201)
  • Medicare Advantage is an option for Medicare
    recipients to enroll in a private health care
    plan rather than choosing traditional,
    fee-for-service Medicare (Part C of Medicare)
  • While the idea was to provide a more-efficient,
    lower-cost option, Medicare Advantage plans have
    turned out to be more expensive (up to 150 of
    traditional Medicare)
  • The low-hanging fruit of cost savings
  • Estimated savings 135 billion

Medicare Advantage Payments Relative to
Traditional Fee-for-Service Medicare, 2009
Traditional Fee-for-Service Medicare
Medicare Advantage Plan Types
NOTE HMO is health maintenance organization PPO
is preferred provider organization.SOURCE
Medicare Payment Advisory Commission, December
Part B Medicare premium calculation for
high-income recipients ( 3402)
  • Part B of Medicare covers physician fees,
    laboratory fees and other outpatient services
  • Most Medicare recipients pay 25 percent of the
    Part B premium currently, higher income
    recipients pay between 35 and 80 percent of the
    Part B premium.
  • PPACA freezes the income thresholds for
    higher-income premiums at 2010 levels for ten
    years before resuming annual adjustments for
  • Estimated savings 25 billion

Reduction in disproportionate share hospital
(DSH) payments ( 3133 )
  • DSH payments are made to hospitals that treat a
    disproportionate share of low-income patients
  • Originally introduced to compensate hospitals for
    higher costs of treating low-income patients now
    justified as a way to maintain access to care for
    low-income patients
  • Estimated savings 22 billion

Independent Payment Advisory Board (IPAB) ( 3403)
  • IPAB will develop proposals to keep Medicare
    spending within statutory targets, and proposals
    will automatically take effect unless Congress
    adopts substitute provisions
  • Proposals may not ration health care, raise costs
    to recipients, restrict benefits or modify
    eligibility criteria
  • IPAB also will provide Congress with
    recommendations for slowing the growth of health
    care spending in the private sector.
  • Estimated savings 16 billion by 2020, more
    substantial after that (assuming it works)

Independent Payment Advisory Board (IPAB) ( 3403)
  • Concerns about IPAB
  • Will IPAB focus on short-term fixes rather than
    long-term changes that really can bend the cost
  • Will Congress bypass the IPAB process and
    authorize increases in funding through
    independent legislation?
  • Are the limitations on the kinds of proposals
    that IPAB can develop too restrictive?
  • Will cuts in reimbursement reduce patient access
    to physicians?

Patient-Centered OutcomesResearch Institute (
  • Created to promote comparative-effectiveness
    research (CER)
  • Research that evaluates and compares the patient
    health outcomes and benefits of two or more
    medical treatments or services
  • Responsibilities include
  • Setting priorities for CER and funding CER
  • Analyzing data from CER studies and reporting to
    the public on the significance of the study

Patient-Centered OutcomesResearch Institute (
  • The Institute may not recommend coverage changes
    or other policies based on its analyses, but
  • Medicare and Medicaid may consider the
    Institutes analyses in determining coverage
    policies as long as
  • No denial of coverage solely on the basis of
  • Coverage decisions do not treat the lives of
    elderly, disabled or terminally ill persons as
    having lower value

Can the CER institute become our NICE?
  • NICE evaluates the cost-effectiveness of medical
    therapies and approves those that are
    sufficiently cost-effective for Britains
    National Health Service
  • Treatments are cost-effective if they provide 1
    QALY for no more than 20,000 (now 31,250)
  • Sometime, NICE approves treatments up to 30,000
    (46,900) per QALY
  • Rarely, NICE approves treatments beyond 30,000
    per QALY
  • NICE has approval authority, while the CER
    institute can only issue reports
  • CER institute shall not develop or employ a
    dollars-per-quality adjusted life year . . . as a
    threshold nor shall HHS employ such a measure as
    a threshold for coverage.

Whats a good buy?
Expensive more than 100,000/QALY Reasonable
50,000/QALY (UK upper limit
47,000) Very Efficient less than
25,000/QALY Most writers use 50-100,000 as
upper limit of good value, but public preferences
suggest upper limit over 200,000 Hirth RA, et
al., Medical Decision Making. 200020332-342
Some sample QALYs (2002 dollars)Harvard Public
Health Review (Fall 2004)
  • lt 0 (If the cost per QALY is less than zero, the
    intervention actually saves money)
  • Flu vaccine for the elderly
  • Under 10,000
  • Beta-blocker drugs post-heart attack in high-risk
  • 10,000 to 20,000
  • Combination antiretroviral therapy for certain
    HIV patients
  • 15,000 to 20,000
  • Colonoscopy every five to 10 years for women age
    50 and up
  • 20,000 to 50,000
  • Antihypertensive medications in adults age 35-64
    with high blood pressure but no coronary heart
  • Lung transplant in UK (Anyanwu AC et al. J Thorac
    Cardiovasc Surg 2002123411-420)
  • 50,000-100,000
  • Dialysis for patients with end-stage kidney
  • Antibiotic prophylaxis during dental procedures
    for persons at moderate to high risk of bacterial
    endocarditis (88,000) (Med Decis Making.
  • Over 500,000
  • CT and MRI scans for kids with headache and an
    intermediate risk of brain tumor

COST/QALY Selected Medicare services
Cost of treatment for metastatic colon
cancer(Schrag D. NEJM. 2004351317-319)
Examining the cost and cost-effectiveness of
adding bevacizumab (Avastin) to chemo in
metastatic colon cancer
  • Randomized trial compared chemotherapy alone vs.
    chemotherapy bevacizumab
  • Bevacizumab regimen prolonged median survival
    from 15.6 to 20.3 months (plt0.001)
  • Cost of extra 4.7 months?
  • 101,500 (assuming 5,000 per month for
  • 259,149 per year of life gained (not quality
  • NICE decided not to recommend for NHS coverage

Examining the cost and cost-effectiveness of
adding bevacizumab (Avastin) to chemo in advanced
non-small cell lung cancer
  • Randomized trial compared chemotherapy alone vs.
    chemotherapy bevacizumab
  • Bevacizumab regimen prolonged median survival
    from 10.2 to 12.5 months (p0.007)
  • Cost of extra 2.3 months?
  • 66,270-80,343
  • 345,762 per year of life gained (assuming
    66,270 cost)
  • Grusenmeyer PA, Gralla RJ. J. Clin. Oncology.

Can we make QALY-based decisions?
  • Cost-effectiveness decisions are controversial
  • Prohibited under PPACA from being used as sole
    basis for denying coverage in federal programs
  • Oregon Health Care Plan
  • Ended up with fairly generous basic coverage
  • Mammography screening guidelines in 2009 (even
    though cost wasnt a factor)
  • US Preventive Services Task Force recommended
    that routine screening begin at age 50 instead of
    age 40
  • The tragic choices problem
  • Its difficult to make life-and-death decisions

PPACA demonstration projects
  • Bundled payments for hospital care and for the
    month following discharge (capitation lite)
    (2704 and 3023)
  • Capitation payments instead of fee-for-service
    reimbursement (2705)
  • Incentives for doctors and hospitals to form
    accountable care organizations (financial rewards
    for higher quality and/or lower cost care) (2706
    and 3022)
  • Will integrated systems exploit market power to
    maintain revenues rather than to introduce
    efficiencies and reduce costs?

Quality-adjusted payments under PPACA
  • Incentive payments to hospitals that meet
    specified performance standards (3001)
  • Adjustments to physician reimbursement based on
    quality and cost of care provided (3001)
  • Expansion of reports to physicians that indicate
    how their use of resources in patient care
    compares to use by other physicians (3003)
  • Lower payments to hospitals with high numbers of
    patients who become sicker because of their
    hospital care (3008)
  • Lower payments to hospitals that have excessive
    numbers of patients readmitted to the hospital
    after discharge (3025)

Quality-adjusted payments
  • Pay for performance so far has a mixed track
  • Its difficult to assess quality of caredid a
    patient do well because of or despite the
    doctors intervention?
  • Often, process-based measures are used, but those
    need continual updating
  • Impact has been modest to date

Tax on high-cost health plans (9001)
  • Starts in 2018
  • Imposes a 40 percent tax to the extent that the
    value of coverage exceeds a threshold amount
  • The threshold starts at 10,200 for individuals
    and 27,500 for families (which is about double
    the average cost for health care coverage)
  • The threshold amount is adjusted upward for
    health care cost inflation and higher costs of
    the individuals risk pool
  • Estimated revenues 32 billion in 2018 and 2019

Concerns about the Cadillac tax
  • High costs of high-cost health plans may reflect
    health status of the workforce and health care
    costs of the community rather than the richness
    of the benefits
  • Gabel, et al. 2010
  • Reducing tax subsidies for health care insurance
    may have a regressive effect (i.e., the higher
    taxes may represent a higher percentage of income
    for lower-income persons)
  • Himmelstein Woolhandler 2009 Gabel, et al. 2010

The bottom line under PPACA
  • Between 2009 and 2019, health care spending is
    projected to increase 0.2 as a result of PPACA,
  • Health care coverage is projected to increase by
    32.5 million
  • After the big increase in spending in 2014 for
    the newly insured, health care spending is
    projected to grow by 6.7 rather than 6.8
    between 2015 and 2019
  • Sisko, et al. 2010

Cost containment
  • Outline of todays class
  • The cost problem
  • Is PPACA the solution?
  • If not, how else might we contain costs?
  • What constraints does the law place on cost
    containment strategies?

Cost containment strategies
  • If payers have insufficient bargaining power with
    hospitals and doctors, would a single-payer
    system help?
  • Politically difficult
  • If two big drivers of high costs are physician
    incentives to provide excessive care and patient
    incentives to demand excessive care, what about
    policy changes to remove these incentives?

Changes in physician incentives
  • Salary or capitation for physicians (combined
    with quality measures to avoid under-provision of
    care)could increase physician pay and still
    lower overall costs
  • Doctors today much more willing to be employed
    and paid a salary
  • Capitation would address problem of too many
    prescriptions for expensive drugsCER institute
    important here too
  • Limits on hospital beds, surgical suites, MRI
    scanners and other facilities

Financial incentives for patients?
  • If people are not sufficiently sensitive to costs
    because of insurance, should we use health
    savings accounts or other mechanisms to give
    patients more skin in the game?
  • Raising out-of-pocket costs reduces patient
    demand for care, but
  • Patients do not always distinguish between
    necessary and unnecessary care
  • Caps on out-of-pocket costs prevent patient
    sensitivity to costs of high-cost services (e.g.,
    heart surgery, cancer chemotherapy)
  • Buntin et al. 2006

VA Reengineering Strategy
  • Define and set practice standards that have been
    shown to result in better patient outcomes
    (including elimination of wasteful hospital and
    pharmacy spending)
  • Monitor performance and measure outcomes (with
    both internal and external oversight)
  • Reward good performance and manage
  • Optimize use of technology (electronic records,
  • Promote patient safety initiatives to reduce
    medical error

Cost containment
  • Outline of todays class
  • The cost problem
  • Is PPACA the solution?
  • If not, how else might we contain costs?
  • What constraints does the law place on cost
    containment strategies?

Legal constraints on costcontainment strategies
  • Legal constraints may exist when physicians make
    decisions on the basis of costs on a case-by-case
    basis (as with the closure of ICU beds) and take
    the patients poor prognosis into accountthe
    disparate treatment problem
  • University Hospital, Glanz, Baby K, and Causey
  • Legal constraints also may exist when cost
    containment policies are adopted that have a
    greater effect on persons who are sickerthe
    disparate impact problem
  • Alexander

Protection for the disabled against
discrimination--disparate treatment
  • In University Hospital , doctors and parents
    decided against surgery for a newborn thought to
    have a severe and permanent neurologic disability
  • The US argued that this involved discrimination
    on the basis of disability (in violation of 504
    of the Rehabilitation Act)other children with
    normal neurologic development would have received
    the surgery
  • But whats the relevant comparison? You have to
    treat similar people similarly, but you dont
    have to treat different people similarly. In
    other words, was the withholding of surgery based
    on relevant or irrelevant differences between
    Baby Jane Doe and other infants?

Protection for the disabled against
discrimination--disparate treatment
  • The University Hospital court rejected the 504
    claim on three grounds
  • Congress did not intend 504 to apply to medical
    treatment decisions
  • The problem that was being treated was related to
    the disabling conditionthe disability gave rise
    to the need for treatmentthus, the disability
    was not an irrelevant factor
  • The hospital was willing to perform the surgery
    if the parents agreed

Protection for the disabled against
discrimination--disparate treatment
  • Glanz took a different--and more
    sensible--approach to the 504 question than did
    University Hospital
  • In Glanz, a doctor refused to perform ear surgery
    on a patient because of an HIV infection, which
    was the patients disabling condition.
  • According to the doctor, the disability
    compromised the patients ability to benefit from
    treatmentthe HIV infection raised the patients
    risk of infection from the surgery.
  • According to the court, ability to benefit from
    treatment was a relevant considerationleaving
    the question open as to how much of a

Protection for the disabled against
discrimination--disparate treatment
  • Baby K and Causey illustrate concerns that
    discriminatory treatment decisions may arise
    under the guise of futility claims by doctors
    or hospitals
  • In a futility case, the doctor or hospital argues
    that there is insufficient benefit from treatment
    for the patient (medicine has nothing to offer)
  • But in many cases, the real concern is the costs
    of care

Protection for the disabled against
discrimination--disparate treatment
  • In Baby K, a hospital did not want to ventilate
    an anencephalic child (but it was willing to
    provide artificial nutrition and hydration to the
  • The court invoked EMTALA which requires
    stabilizing treatment in all emergencies
  • The court observed that the hospital would have
    ventilated other children with similar breathing
  • Note the contrast with University HospitalBaby
    Ks breathing difficulties were related to her
    anencephaly just as Baby Jane Does need for
    surgery was related to her disability

Protection for the disabled against
discrimination--disparate treatment
  • In Causey, a hospital withdrew dialysis and
    ventilation from a comatose woman with a 1-5
    chance of regaining consciousness and a life
    expectancy of up to two years.
  • The court rejected the concept of futility on the
    ground that it entails non-medical, value
  • Court held that doctors can withhold treatment
    when it is not part of the medical professions
    standard of care
  • Note the contrast with the Baby K court, which
    rejected a defense based on the professional
    standard of care

Protection for the disabled against
discrimination--disparate treatment
  • Putting all of the cases together, we end up with
    a majority of courts deferring to medical
    judgment, especially if there is evidence that
    the decision is based on the patients diminished
    ability to benefit from treatment (Glanz)
  • Also, courts are more deferential when hospitals
    implement decisions and are then sued rather than
    asking the court to approve the denial of care in

Protection for the disabled against
discrimination--disparate impact
  • Alexander gave a green light to across-the-board
    coverage restrictions that have a disparate
    impact on persons with disabilities
  • In Alexander, Tennessee capped hospitalization
    for Medicaid recipients at 14 days per year
  • Disparate impact because only 7.8 of
    non-disabled persons who were hospitalized needed
    more than 14 days, while 27.4 of disabled
    persons who were hospitalized needed more than 14
  • Plaintiffs argued that the disparate impact was
    gratuitousonly ten states imposed such limits

Protection for the disabled against
discrimination--disparate impact
  • The Supreme Court held (in a unanimous decision
    authored by Justice Thurgood Marshall) that
  • 504 protects against some instances of disparate
    impact discrimination
  • Persons with disabilities must be provided
    meaningful access to the services offered
  • Tennessees durational limit provides meaningful
    access14 days of hospitalization is sufficient
    for 95 of disabled recipients of Medicaid (what
    about the 27.4?)
  • Court greatly concerned with administrative
    burden and feasibility of requiring Medicaid to
    avoid disparate impacts

Protection for the disabled against
discrimination--disparate impact
  • After Alexander, its difficult to imagine
    successful challenges to cost containment
    strategies on the basis of their disparate
  • Especially if meaningful access is interpreted
    with respect to health care generally rather than
    the specific health care service (e.g., cancer
    chemotherapy if coverage for a very expensive
    drug is denied)

Legal constraints on cost containment
  • The case law indicates that political constraints
    are much more important than judicial constraints
  • Bush 41 and Oregon Health Plan
  • Note that legal constraints are less relevant as
    rationing policies become less explicit
  • If we try to lower spending by placing physicians
    on salary or shifting costs to patients, then it
    becomes even more difficult to mount a
    discrimination claim

What is a QALY?
Perfect health
  • Organisation for Economic Co-operation and
    Development ( Thirty-three member
    countries include
  • U.S., Canada, Mexico, Chile
  • Denmark, Norway, Sweden, Finland
  • U.K., France, Germany, Netherlands, Switzerland
  • Portugal, Spain, Italy, Greece, Turkey, Israel
  • Hungary, Czech Republic, Slovak Republic,
    Slovenia, Poland
  • Japan, Korea
  • Australia, New Zealand