The news in recent years has been good: Overall U.S. spending for health care in 2011 again grew only 3.9 percent. This represented the third consecutive year of a relatively slow growth rate, down from rates as high as 11 percent in 1990 and 7.6 percent in 2007. According to a report covering through last year, per-beneficiary Medicare spending grew at 1.7 percent annually from 2010 to 2012, down from growth of 4.3 percent between 2008 and 2009, and 5.3 percent between 2007 and 2008.

What accounts for the recent flattening of the cost curve and is it a transient phenomenon? The answers have significant implications for the nation’s current and future fiscal challenges, so the debate has been vigorous and particularly well reported in the recent press.

Sustainable or Not

Some economists argue that the lower rates of health spending growth reflect a prolonged economic slowdown and that once the economy returns to a more normal growth rate, the health spending growth rate could be expected to rise. This thesis is based on historical relationships between changes in economic growth and health spending growth.

Other experts note that benefit design changes in employer-sponsored health plans could more permanently decrease spending growth, because higher out-of-pocket costs for enrollees lowers their use of health care services. Some economists combine recessionary-created reasons for the flattening curve with changes that are more structural and long-term in nature, such as slower pharmaceutical and imaging spending, increased cost sharing, and greater provider efficiency.

As a cost-bending trend, policy experts add declines in real income, which in recent years led to a shift from private to public (Medicaid) coverage and slowed growth in providers’ revenues, forcing cost-containment efforts. Based on spending rebounds after past cost-containment attempts, they express understandable skepticism that the most recent slowdown will be lasting, but conclude that various pressures on providers and new payment mechanisms could prevent the return of historically high rates of health spending growth.

Transformation of Care Delivery

It is likely that important structural changes are occurring in health care and that these changes are a major contributor to bending the spending curve and to permanently removing costs from the delivery system. Although the proof for this point of view is not yet definitive, the depth and breadth of change suggest that significant transformation in the nation’s delivery system is under way.

We think it is further likely that health care has turned a significant corner and that spending is unlikely to bounce back to levels seen from 1980 to 2009. There’s no one big “home run” reason or even a handful of reasons why this is true. Rather, the “power of a million ideas” is enhancing health, improving care, and reducing costs. “The way we are providing care is changing and does account for the slowing of health care spending,” said Atul Gawande, M.D., who has done much work to define the improvement path for hospitals and physicians.

Provided here are examples that offer early evidence of structured systemic changes that are lowering the overall cost of U.S. health care while improving quality and outcomes. Taken together, these trends and initiatives are having an important and, perhaps, powerful effect.

Hospital Readmissions Are Down

Hospital readmissions, which cost the federal government $26 billion per year for Medicare patients alone, are dropping. In calendar year 2012, the average 30-day hospital readmission rate for Medicare beneficiaries—often a key indicator of poor quality care—decreased 0.6 of a percentage point, from 19 percent to 18.4 percent. From 2007 through 2011, the readmission rate had been stubbornly fixed at about 19 percent.

CMS notes that the recent decline represented 70,000 fewer hospital readmissions for the year. This is an important step in the right direction. In an interview, Jonathan Blum, Deputy Administrator and Director of CMS, recently said, “There is something fundamentally changing in health care. Hospital admissions are being better managed and are being reduced.”

Hospitals and other care providers are using many different strategies to improve outcomes and reduce readmissions, including comprehensive discharge planning, medication management, transition care support, home visits by nurses and student nurse coaches, remote home telemonitoring, and many others. CMS penalties for preventable readmissions may be accelerating initiatives, but significant work has been under way for at least the last five years. These efforts are reducing overall utilization, improving care hand-offs, and redirecting care to appropriate settings to improve outcomes and the patient experience.

EHR Use Is Up

The National Center for Health Statistics reports that nearly 72 percent of office-based physicians used electronic health records (EHRs) in 2012, up from 48 percent in 2009 and 18 percent in 2001. Adoption of EHR systems among hospitals also is rising. Forty-four percent of acute care hospitals had a basic EHR system in 2012, nearly triple the number of hospitals that had such systems just two years earlier, reports the Office of the National Coordinator for Health Information Technology.

Use of EHRs has been proven to improve clinical care processes and the coordination of patient care across providers, thereby enhancing outcomes and the overall patient experience, and increasing operational efficiencies. Early EHR adopters have track records of better care quality and efficiency.

For example, within one year of implementation, Gundersen Lutheran Health System’s computerized provider order entry system reduced medication errors from 17.9 to 15.4 per 1,000 hospital days, and laboratory tests per week per hospitalization from 13.9 to 11.4. Evidence-based decision aids, ordered through Group Health’s EHR for patients with osteoarthritis at a large orthopedic group practice reduced hip replacement surgeries by 26 percent and knee replacements by 38 percent. Better-informed patients who understand treatment alternatives and the probabilities of surgical benefits and harms opt more often not to have surgery.

The point is that EHR use is changing care processes, and how hospitals and doctors interact with patients, in structural ways. The suspicion is that these process changes are having a positive impact on cost and quality.

Quality Is Improving

The quest to improve quality is as old as the practice of medicine, but real progress has been made in recent years through aggressive initiatives to address specific problems that add big costs to the health care system. Health care-acquired infections (HAIs), which cost an estimated $28 billion to $34 billion annually, have been an area of particularly intense focus for hospitals and health systems.

Recent data on hospital HAIs from the Centers for Disease Control and Prevention indicate that between 2008 and 2011, central line-associated bloodstream infections (CLABSIs) decreased 41 percent, and surgical-site infections decreased 17 percent. Catheter-associated urinary tract infections (CAUTIs) declined 7 percent between 2009 and 2011.

More than 3,700 hospitals currently are working within 26 CMS-sponsored Hospital Engagement Networks to reduce HAIs, including adverse drug events, CAUTIs, CLABSIs, and ventilator-associated pneumonia (VAP). The American Hospital Association’s Health Research & Educational Trust is managing this initiative.

Other collaborative efforts among hospitals also are under way. For example:

  • Between 2010 and 2012, 75 hospitals in the New York State Partnership for Patients decreased early elective deliveries by 38 percent, CLABSI by 22 percent, VAP by 19 percent, and pressure ulcers by 66 percent.
  • 37 Tennessee hospitals that are participating in the “Healthy Tennessee Babies Are Worth the Wait” partnership reduced preventable early elective deliveries 75 percent in seven months—from 14.1 percent to 3.5 percent of all deliveries in the state.

As the Dartmouth Atlas Project has been documenting for decades, bad quality increases costs; better quality reduces costs. Because the “fixes” for problematic performance often involve changes to core health care processes, improvement can be structural in nature, which can remove costs permanently. For example, strategies to eliminate CAUTIs, which costs the nation $400 million to $500 million per year, include use of a closed urinary drainage system. Strategies to reduce CLABSIs include specific insertion practices. To prevent early deliveries, standardization of methods to assess gestational age is under way.

Innovative solutions are emerging to help solve even the most intractable of problems, such as the failure of health care staff to wash their hands. For example, in many hospitals a Wi-Fi or Bluetooth-enabled badge worn by health care staff communicates with a sensor on every sanitizer and soap dispenser, and with a beacon behind patients’ beds.  “If the wearer’s hands are not cleaned, the badge vibrates, like a cellphone, so that the health care worker is reminded but not humiliated in front of the patient,” describes the author of a recent article in The New York Times.

Benefit Redesign, Consumerism, and Transparency Are Changing Behavior

Benefit redesign, consumerism, and increased transparency of all types of health care data are changing consumer and provider behavior, thereby eliminating utilization and reducing health care spending.

As insurance offerings shift from defined-benefits to defined-contribution health plans, employers and payers are making available to employees information on hospital and physician costs, quality, and customer satisfaction. In defined-benefit consumer-directed health plans (CDHPs), employees typically select their health insurance and provider network from an array of options. Transparent and specific data on hospital and physician performance guide their decision making.

Enrollment in CDHPs grew sharply to 16 percent in 2012 from 3 percent in 2006. Consumers with higher copays and deductibles have more skin in the game and thus are more careful about when and how they use health care services. As better shoppers, they compare prices for treatments at area health providers, and use and spend less.

Utilization and total spending drops can be dramatic. For example, in one “early-adopter” company, utilization fell 17 percent the first year the company switched to a consumer-driven health plan; its total health care spend per employee was one-third less than the national average.

Such cost savings are permanently removed from the health care system. A recent study estimates that benefit design changes account for about 20 percent of the decline in health spending growth.

Additionally, public reporting of performance data is changing physician behavior, increasing quality improvement interventions, and reducing unwarranted variation in care. For example, a recent analysis of a consortium of physician groups in Wisconsin indicated that kidney function monitoring in patients with diabetes increased 17 percent since the first year of public reporting of individual physician performance on ambulatory measures. Physicians who receive data with evidence of unwarranted variation in their own care—whether related to quality, outcomes, and/or cost—typically need no further inducement to bring their practices in line with their colleagues.

CMS has made comparative quality-related data available on hospitals through Hospital Compare for a number of years. CMS’s release in April and June 2013 of Medicare provider inpatient and outpatient charge data is adding considerable transparency to hospital pricing.

New Care and Payment Models Are Reducing Utilization

Use rates for inpatient and certain hospital outpatient services are declining in many areas of the country. A multistate study, encompassing nearly half of the nation’s population, indicated that inpatient use rates per 1,000 declined at a rate of between 0.6 percent and 13.3 percent from 2006 to 2011. We believe that these declines reflect not only recessionary factors and slow economic recovery, but the beginnings of fundamental change brought by new care and payment models.

The Affordable Care Act boosted development of accountable care organizations (ACOs), which are forming rapidly in both the commercial and government sectors. CMS indicates that more than 250 ACOs have been established since 2010; more than 300 ACOs have been counted in the commercial sector.

Although the full impact of ACOs on quality, outcomes, and cost, has not been experienced or documented yet, this care model is likely to have a positive effect during the next years. This belief is based on watching organizations that have been working under similar care models for a considerable number of years.

For example, Advocate Health Care in the Chicago area has been using a clinical integration accountable care-like model that incentivizes employed and independent physicians to improve quality and lower costs. Table 1 shows the most recent year-to-year results achieved by its highly aligned physician organization through a value-based contract with Blue Cross Blue Shield of Illinois. Inpatient admissions per 1,000 are down 6 percent and days per 1,000 are down nearly 9 percent. Advocate’s physicians have been encouraged to “rethink” how they provide care and why they admit patients to the hospital, comments Lee Sacks, M.D., CEO of Advocate Physician Partners and Executive Vice President and Chief Medical Officer of Advocate Health Care. This rethinking brings structural change.
……………………………………………………….TABLE 1
Table 1. Utilization Rates with PPO: Q2 2012 versus Q2 2011
Source: AdvocateCare/Advocate Physician Partners. Used with permission of Lee Sacks, M.D.
Similarly, a pilot initiative in Sacramento, CA, organized by Blue Shield of California, used an ACO model with an annual global budget payment to improve quality and reduce total spending related to coverage for the 41,000 members of CalPERS in the Sacramento area. Between 2010 and 2011, it lowered the annual growth rate in per member per month (PMPM) cost by more than 50 percent, resulting in a $37 million savings to CalPERS.

The global budget approach aligns provider incentives through risk sharing that encourages all parties to keep patients healthy and to use clinical interventions only when needed. Paul Markovich, President and CEO of Blue Shield of California, comments that the approach “lets partners quickly identify clinical and cost ‘hot spots’ where opportunities exist for the greatest improvement. Partners can then agree on what changes to make and can create value by reengineering the clinical process.”

For example, the participating providers—Dignity Health and Hill Physicians Medical Group—designed a new discharge planning process, which helped reduce 30-day readmissions from 5.4 percent of cases in 2009 to 4.1 percent in 2011. “This innovative model may help Americans get the care they need at a price they can afford,” concludes Markovich.

Other Forces Will Likely Move the Needle

Beyond CDHPs, innovative employers are using approaches that likely will remove significant costs. Direct contracting with “Centers of Excellence” is one such approach. Lowe’s, a national chain of home improvement centers with 200,000 covered beneficiaries, contracted with a single provider—The Cleveland Clinic—for its cardiac and spine procedures, and care for back pain. Lowe’s eliminated any cost-sharing provisions for beneficiaries who use the Cleveland Clinic for such care.

Even bigger in likely impact in this domain is Walmart, the No. 1 company of the Fortune 500. Walmart now steers patients who need heart, spine, and transplant surgeries to six of the leading U.S. hospitals and health systems. It has bundled fee arrangements with these organizations, many of whom use salaried physicians whose incentives are not tied to volume. Beneficiaries that use one of the designated organizations incur no out-of-pocket costs; those that decide to go elsewhere have significant copayments and deductibles.

Walmart is a proven leader in relentlessly driving costs out of a “supply chain,” but the company also is interested in getting the right care for the right outcome. “The first question should be, ‘Is the treatment or surgery the correct one? In other words, is it right for the patient and is it needed at all?’” commented Sally Welborn, Walmart’s Senior Vice President of Global Benefits. The company established an “assessment only” bundle for providers seeing spine patients. “Based on a thorough assessment at a designated organization, half of the time patients suffering back pain don’t need the surgery,” said Welborn. Utilization goes down and patient outcomes are better with non-surgical interventions.

Another innovative model likely to reduce costs and improve care is direct-to-employer primary care services at clinics located in or near the employer. For example, Paladina Health, which is owned by DaVita Healthcare Partners, has more than 30 employer-based clinics in 12 states. The model is pure capitation: the patient has no costs and all physicians are employed. Because primary care physicians can satisfy 85 to 90 percent of patient needs, specialists and hospital care utilization averages 6 to 12 percent lower, and many employers experience significantly lower health care costs, cites the company.

Finally, additional real structural cost-reduction progress will be made when providers get serious about reviewing their portfolios of businesses, facilities, and services to eliminate those that could be better managed by other companies and to concentrate on their core offerings. Health care’s current delivery system needs to be reshaped to be more efficient and effective. As described elsewhere, to accomplish this, providers will rightsize the businesses and services they own and the distribution of each, removing costly capacity from the system.

Final Comments

Many more trends and practices than can be documented in one article are reshaping health care, bending the spending curve and structurally removing costs while improving quality and outcomes. The thousands of science projects that started occurring a few years ago are powering thousands of additional ideas to improve the system. In this environment, if someone in a 300-bed hospital identifies a good idea, it’s very likely the hospital is testing that idea, and putting new improvements to work right away. We believe that these initiatives are “taking hold,” and, combined with the trends described here, are accelerating progress toward sustainable health care spending.