Health Affairs

The release of average charges for common procedures in more than 3,000 U. S. hospitals last week by the Centers for Medicare and Medicaid Services (CMS) elicited divergent reactions – not surprisingly. On one hand, it was front-page news for most of the major newspapers: “Hospital Billing Varies Wildly, Government Billing Data Shows,” was the headline in the New York Times. The article went on to speculate that these new data would likely “intensify a long debate over the methods that hospitals use to determine their charges.”

On the other hand the data were “old hat” to most health policy analysts. Several colleagues mentioned to me that “this is old news” and “it isn’t meaningful at all because we all know that charges don’t mean anything.”

“No one pays charges” is the common refrain. “Charges are merely an accounting fiction.”

Charges Do Matter — They Matter A Great Deal

Counter to the belief of both hospital industry representatives and many of my colleagues, hospital charge levels and rapidly escalating charges matter a great deal. While individual states and the Affordable Care Act (ACA) have instituted limits on the amounts low-income uninsured patients pay hospitals, insured patients that receive care at hospitals that are “Non-Par” or “out-of-network” are still victims of hospital’s exorbitant charging practices. When patients receive emergency services at an out-of-network hospital, the patient and/or insurance company (depending on insurer cost sharing for out-of-network care) pay full charges.

High and increasing hospital charges, combined with increasing proportions of cases admitted through the hospital Emergency Department (ED), are major factors behind the ever-declining negotiating leverage of private health insurers. This situation, coupled with the increased pricing power of the ever-more-concentrated provider industry, will be a major contributor to the almost certain rapid escalation in total U.S. health care costs in coming years.

The Affordable Care Act included provisions to accelerate the transition to value-based payment, including Accountable Care Organizations (ACOs). Many private sector insurers, providers and employers also are moving in this direction.

However, many of today’s measures are inadequate to the task of assessing and paying for value. Current measures focus on process and clinical outcomes, as opposed to health status, and few are based on patient-reported data that would measure the overall care experience.

In addition, most measures are add-ons to current work rather than an integral part of the care process, requiring manual chart reviews and retrospective data analysis. Not only does this make implementation burdensome, it limits opportunity for real-time feedback and adjustment.

These inadequacies create opportunities to implement new measures that will be more meaningful to consumers, clinicians, purchasers and policy makers. But to avoid a proliferation of measures that are inconsistent or questionable in terms of assessing value, a framework is needed to define specific measures for each component of value – health outcomes, patient experience and per capita cost (see Table 1, click to enlarge).

In less than nine months millions of Americans will receive new health care coverage through provisions of the Affordable Care Act. Most observers believe that strong physician leadership can help heath care reform succeed, through the optimization of care quality and cost management. But, at the same time, too many American physicians are dissatisfied with current medical practice, and unsure of what to do about it. Many would not recommend a career as a physician to their own children.

There are multiple causes for this dissatisfaction where it exists, including unpredictable reimbursement for services, excessive work burden and long hours, and excessive time devoted to non-clinical activities, including “paperwork”.

One possible reaction to physician dissatisfaction is a shrug of one’s shoulders. Most physicians are well paid, compared to most Americans, and are highly respected. We suggest, however, that improving physician practice satisfaction should be important for both patients and policymakers.

Much has been made of the slowdown in health spending growth and the role played by the economy. I have to confess that my first take, after studying plots of business cycles and health spending, was that health spending “had a mind of its own” and paid no attention to business cycles. Consider the two most recent recessions depicted in the chart below. During the recession of 2001, health spending growth actually shot up at the same time that the growth in gross domestic product (GDP) was dropping, and continued to rise even after the recession officially ended.

During the Great Recession, spanning December 2007 through June 2009, the growth in health spending dropped by about 2 percentage points and then leveled off while GDP growth dropped by nearly 10 percentage points and then quickly rebounded to a more normal long run rate of growth (though not sufficient to make a large dent in unemployment). I hope you can see why I was skeptical of a predictable relationship.

Following the third straight year in which the Centers for Medicare and Medicaid Services estimated the growth in national health expenditures to be a record-low 3.9 percent, considerable speculation on the causes of slower spending growth has come from a variety of sources. There seems to be a consensus among actuaries, academics, and other analysts that the recession and the associated increase in unemployment and decline in insurance coverage led individuals to cut back on their use of health care services. (See here, here, But, while the recession is clearly associated with the dramatic slowdown in spending growth from 2007-2009, there is also evidence that the slowdown in spending preceded the recent recession and seems to be continuing during the modest economic recovery.

Observers of this more general trend have begun to suggest that fundamental structural changes in the health system are playing a role in recent spending trends. The ability of some high profile providers and health systems to achieve high quality outcomes with greater efficiency has garnered a lot of attention and some suggest that more salaried employment of physicians could be altering the practice patterns that developed under a fee-for-service system. Others have pointed to patient-centered medical homes, accountable care organizations, and other payment and delivery system reforms as potential contributors to the slowdown in spending growth. The Obama administration has also argued that the Affordable Care Act has started to have a moderating effect on spending growth.

The extent to which the economy versus broader systemic changes has been driving slower spending growth has enormous implications for forecasting future spending trends. If the economy has been the primary driver of recent trends, we should expect spending growth to return to historically high levels as the economy recovers. The Congressional Budget Office (CBO) and the CMS actuaries have revised their Medicare and Medicaid forecasts downward to reflect the latest trends, but both entities seem to suggest that spending growth over the long term will return to historical levels. If, however, more structural changes are at work, then perhaps there is reason to be hopeful that health care spending growth will continue at a rate much closer to the rate of growth in the economy.

Health Affairs’ May issue, released today, analyzes the recent slowing in the growth of health care expenditures and explores whether the trend will last. The issue also addresses major cost drivers in Medicare and presents proposals for putting the program on a more sustainable path. Another article tracks federal spending on mental health during severe state budget constraints throughout the recession.

As Health Affairs Founding Editor John Iglehart notes on his “From The Founding Editor” page (quoted at length below), the new thematic volume, “Tackling The Cost Conundrum,” continues the journal’s coverage of a topic that has been a “driving theme” of the journal since its inception. The May issue will be discussed at a National Press Club briefing tomorrow morning, Tuesday, May 7. The issue and briefing are supported by a grant from the Robert Wood Johnson Foundation.

Researchers writing in the new issue are cautiously optimistic that the slowdown in health care spending is here to stay. A study by Michael Chernew, Alexander Ryu, and colleagues at Harvard Medical School looks at two factors potentially contributing to the record slowdown in growth to 3.1 percent during 2007-11: job loss and benefit changes shifting costs to the insured. Analyzing National Health Expenditure Accounts and large-employer data, the authors found that benefit design changes that increased enrollees’ out-of-pocket costs were responsible for about one-fifth of the observed decrease in the rate of growth. However, the slowdown occurred even when benefit generosity at large firms was held constant. The authors suggest that other factors are largely responsible and that major events, such as health reform, shifts in payment methodology, and the transformation of the delivery system’s organization may contribute to a longer-term trend of slower spending growth.

In a related article, David Cutler and Nikhil Sahni of Harvard University conclude that fundamental changes, including less-rapid development of imaging technology and new pharmaceuticals, increased patient cost-sharing, and greater provider efficiency, led to the majority of the slowdown in health care spending growth; if this path continues for the next ten years, public-sector health care spending could wind up $770 billion under projections, they write.

In a publication released in numerous states as well as a JAMA Forum article and a recent list of ten supposed “myths” about Medicaid expansion, the Heritage Foundation repeatedly cites our paper for the proposition that “40 of 50 states are projected to see increases in costs due to the Medicaid expansion,” and that expansion would force such states “to dig deep into their already overstretched budgets.” Even in the 10 remaining states, according to Heritage, the budget gains we projected to result from expansion were speculative and uncertain, since they supposedly relied on states cutting payments for hospital uncompensated care.

These claims distort our work. We identified 10 states in which Medicaid expansion would yield net savings based on just one factor—namely, unusually generous prior Medicaid coverage, for which states could claim enhanced federal matching funds. The modest additional gains resulting from uncompensated care savings did not tip any state from the red into the black.

Medicaid Expansion Offers Budget Savings, Revenue, and Economic Gains to States

More importantly, Heritage ignored our explanation that, because we were limited to “data available for all 50 states and the District of Columbia, we were unable to estimate several potential sources of state fiscal gain;” and that if additional, state-specific factors were considered, “many more states could realize net fiscal gains.” Nor did Heritage acknowledge that all states must pay for national health reform but only those that expand Medicaid will receive large, offsetting allotments of federal Medicaid dollars, with resulting economic activity, jobs, and state revenue.

Although the April 1 Call Letter from the Centers for Medicare and Medicaid Services (CMS) seemed to reverse proposed rate cuts to Medicare Advantage (MA) plans, the outlook for insurers still isn’t rosy. The “all-in” impact of the per capita rate increases will be offset by new risk coding intensity adjustments, shifts to fee-for-service parity, and the Health Insurance Tax, actually resulting in an expected 2-3 percent cut for MA plans for 2014.

The Call Letter also limits beneficiary cost sharing, a lever that plans have typically used to offset reductions. Such measures come on top of the potential risk of reductions from sequestration, which may lower fee-for-service (FFS) and health plan capitations by a further 2 percent per year.

The expected impact is lower than the original CMS proposal of 8 – 9 percent for 2014, but the announcement still serves as an urgent reminder of the endgame for Medicare— the rate cuts outlined in the Affordable Care Act (ACA) that will result in approximately 14 percent reductions in MA reimbursements, relative to pre-ACA reimbursements, by 2017. Traditionally MA has enjoyed a rate premium compared with FFS, often justified by the enhanced benefits available to members. These cuts, however, will put the plans roughly at parity.

Diagnostic and Statistical Manual of Mental Disorders (DSM-5), the association’s comprehensive guide that sets the classification, diagnosis, and treatment of mental disorders across the United States and the world. In an April 24 Health Affairs Web First analysis and commentary, Helena Hansen of New York University and coauthors argue that the revision process for the DSM-5 missed crucial population-level and social determinants of mental health disorders and their diagnoses.

Some of these include environmental factors triggering biological responses that manifest in behavior; differing cultural perceptions in defining normal and abnormal behaviors; and institutional pressures, such as insurance reimbursements, disability benefits, and pharmaceutical marketing. At stake, the authors believe, are billions of dollars in insurance payments and the accurate diagnoses and treatment of patients.

To address future DSM revisions, the Hansen and her colleagues propose the formation of an independent, multidisciplinary task force; the commentary outlines how this task force would operate.

A belated nod to the latest Health Wonk Review, posted last week by Louise Norris at Colorado Health Insurance Insider. Louise has assembled a number of great posts, including Peter Neumann and James Chambers’ Health Affairs Blog post on Medicare’s reset of its “coverage with evidence development” policy.

Does the United States have at its disposal a method for predictably controlling the cost and improving the quality of our health care? Can we begin by budgeting or Indexing Health Care expenditures in the Medicare HMO program now called Medicare Advantage (MA) to grow at the same rate or more slowly than the gross domestic product (GPD)?

The Indexed Health Care proposal that I outline below builds on the success of MA, but it also calls for important reforms in that program. After indexing MA costs to GDP growth, the next steps should be to progressively convert Medicare from fee-for-service to prepaid capitated payments, and to index Medicare and all federal health care expenditures – including tax expenditures – to GDP growth. The private health care sector must be persuaded to move from FFS to capitated payments.

Mark Grube, Kenneth Kaufman and Robert York’s analysis of the decline in hospital utilization rates leads the Health Affairs Blog most-read list for March. Also on the top-ten list are articles on: the human face of hospital readmissions by Risa Lavizzo-Mourey; the impact of the Affordable Care Act by Kathleen Sebelius; the health care workforce by Thomas Daschle; and physician payment reform by Bill Frist and Steven Schroeder.

The most-read list also includes David Muhlestein’s survey of the accountable care organization landscape; Diane Archer’s discussion of the effects of concentration in the health care market, and Jesse Singer’s look at the use of electronic health records by the New York City Primary Care Information Project. Also among the top ten are Tim Jost’s article about the role of federally facilitated and partnership exchanges; and an article by Sara Rosenbaum and Joel Teitelbaum on the impact of the Essential Health Benefits rule on persons with disabilities.

The April issue of Health Affairs, released today, examines how all high-income countries are struggling to achieve the “Triple Aim” — better health and better health care at lower cost. The articles in this issue find that the United States and other high-income countries have much to learn, with the “trade” in strategies and tactics likely to flow both ways.

Join us on Thursday, April 11, for a briefing on the April issue. Support for the new Health Affairs volume was provided by The Commonwealth Fund, Britain’s Nuffield Trust, and the Institute of Global Health Innovation at Imperial College London.

Drug Payment And Pricing — How Do US Practices Compare With Other Countries?

A featured study by Panos Kanavos of the London School of Economics and Political Science and coauthors compared prescription drug prices among selected countries that are members of the Organization for Economic Cooperation and Development in 2005, 2007, and 2010. Depending on how prices were adjusted for the volume of drugs consumed in the various countries, drug prices in the United States were between 5 percent and nearly 200 percent higher than in the other nations studied. A key contributing factor is that the United States takes up new and more expensive prescription drugs faster than other countries. The authors recommend that the United States require pharmaceutical manufacturers to provide more evidence about the value of new drugs in relation to cost before use of such drugs is reimbursed.

Today, Health Affairs released a Web First article by Tsung-Mei Cheng describing early results from a pilot project underway in several of China’s rural provinces that combines new case-based payments for providers and evidence-based clinical pathways for management of patients. Before and after studies and analyses show a reduction in overall length of hospital stays, drug spending and usage, and patients’ out-of-pocket spending. Patient-provider communication and relations reportedly improved, and hospitals did not experience any revenue losses.

Medicare is poised to revise its “coverage with evidence development” (CED) policy, which has important implications for beneficiaries’ access to new medical technology as well as manufacturers’ reimbursement for their products.

For years, Medicare has employed CED, under which the program provides conditional coverage for new technology while it collects additional evidence on the technology’s effectiveness. The concept has great intuitive appeal in that it promises to provide access to promising technology for which the evidence base may be immature. As Medicare officials and other experts have argued, by linking coverage of new technologies to requirements that patients participate in registries or clinical trials, CED can help identify the circumstances in which patients are most likely to benefit and potentially accelerate access to innovations.

Though Medicare has experimented with conditional coverage policies since the 1990s, the formal CED designation and its characterization date to two guidances the Centers for Medicare and Medicaid Services (CMS) issued in 2005 and 2006. CMS has used CED in 19 cases over the years on diverse technologies, including lung volume reduction surgery, implantable cardioverter defibrillators (ICDs), and positron emission tomography (PET) for cancer. (See Table 1 at the end of the post, click twice to enlarge.) The CED policies have varied in their data collection requirements, with some featuring randomized controlled trials and others relying on patient registries or other data collection strategies

Most experts agree that primary care needs to be re-invented. There are a lot of promising ingredients of practice redesign: better scheduling, electronic medical records with patient portals, redesigned clinician workflow, and work sharing. Linda Green’s intriguing article in the January Health Affairs simulates a strategic combination of these changes and argues if they all happened at once, we would have no primary care physician shortage.

Even if we make much more effective use of clinical time and energy, however, Green’s formula isn’t going to get us far enough fast enough. The baby boom generation of physicians is fast nearing its “sell by” date. In 2010, one quarter of the 242,000 primary care physicians in the US were 56 or older. One in six general internists left their practices in mid-career. Many more hardworking clinicians delayed retirement due to the 2008 financial collapse.

Few manpower specialists have noted the cohort effect likely to manifest itself shortly. A continued economic recovery and, more importantly, a recovery in retirement plan and medical real estate asset values will lead as many as 100,000 physicians of all stripes to leave practice in the next few years. We will be replacing a generation of workaholic, 70-hour-a-week baby boom physicians with Gen Y physicians with a revealed preference for 35-hour work weeks. During this same period, we’ll be adding 3 million new Medicare beneficiaries a year and enfranchising perhaps 25 million newly insured folks through health reform. “Train wreck” is the right descriptor of the emerging primary care supply situation.

A Health Affairs Web First article released today describes the new rapid-cycle approach to program evaluation at the recently established Center for Medicare and Medicaid Innovation. The Affordable Care Act created the Innovation Center within the Centers for Medicare and Medicaid Services (CMS) to test payments and service delivery models, reduce costs in Medicare and Medicaid, and improve quality.

As the Innovation Center moves ahead with innovative payment and service delivery models, the Rapid Cycle Evaluation Group at the center delivers frequent feedback to providers while evaluating the outcomes of each model tested. When a model is considered for testing, staff from the Rapid Cycle Evaluation Group and CMS’ Office of the Actuary are immediately assigned to help create the model. The Office of the Actuary provides timely and impartial actuarial, economic, and statistical estimates–and monitors Innovation Center initiatives once testing has begun. This group’s rigorous and speedy assessment and evaluation is driven by performance metrics and robust new methodologies.

Researchers from the evaluation group have also been organized into “affinity groups” and use CMS data to answer critical policy questions that may shape future payment and service delivery models. The Innovation Center also plans to identify and promote population health metrics–measures of the functional status, healthy behavior, and health outcomes of a population–to promote disease prevention and achieve a more accountable, equitable, and coordinated health care system. All these efforts will contribute to the Innovation Center’s success in carrying out its mission of improving the quality of care combined with the slowing spending growth.

In the late 1990’s, smarting from the collapse of managed care, HCFA’s retreat from the public release of provider performance data, and continued large increases in health costs in the face of evidence of waste and variation in quality, a group of large employers established the so-called “value agenda” and committed to using purchasing leverage to achieve it. Value was defined by the simple equation of quality/cost.

Organizations like GE, where I worked at the time, realized that we needed to start with transparency, to make quality variations that mattered to consumers and patients visible. Thus, The Leapfrog Group was born. The announcement of its formation and the release of the Leapfrog Hospital Survey occurred between the publication of two seminal Institute of Medicine reports, “To Err is Human” and “Crossing the Quality Chasm,” and helped the value-purchasing agenda gain traction.

Transparency, however, while a necessary and important beginning, is not alone sufficient. To borrow from the Institute of Medicine’s tagline, taken from Goethe, “Knowing is not enough; we must apply. Willing is not enough; we must do.” A hard-working clinician in Cincinnati described how hard it was to “do” and made it clear that we need to tackle changing the payment system next. He was referring to the fact that in his fee-for-service practice, the better care he took of his patients with diabetes, the lower his income became. Those frequent phone calls to adjust insulin doses led to fewer complications and fewer office visits. He summed it up by saying that, “if I keep getting better, I’ll go right out of business.” It became obvious that if we don’t work to change our payment system, which at its worst punishes quality and efficiency and at its best is indifferent to them, it is disingenuous to expect better quality and efficiency.

For decades before the passage of the Affordable Care Act, health care costs outstripped inflation, without corresponding improvements in health care quality. Our system didn’t incentivize quality or efficiency. We paid providers for the quantity of care, not the quality of care. And we were not using technology to deliver smarter care.

The Affordable Care Act includes steps to improve the quality of health care and lower costs for you and for our nation as a whole. This means avoiding costly mistakes and readmissions, keeping patients healthy, rewarding quality instead of quantity, and creating the health information technology infrastructure that enables new payment and delivery models to work.

Here are just a few ways that the health care law builds a smarter health care system and incentivizes quality of care – not quantity of care – to drive down costs and save you money.

David Muhlestein’s survey of the Accountable Care Organization landscape leads the Health Affairs Blog most-read list for February. Also on the month’s top-ten list are three posts dealing with patient engagement by Chas Roades, Paul Wicks and John Hixson, and David Rothman. These posts accompanied the publication of Health Affairs’ February issue, “New Era of Patient Engagement.”

The most-read list also includes two posts by Tim Jost on implementing the Affordable Care Act, as well as posts on medical education, pharmaceutical pricing, and the process of setting Medicare reimbursement rates for physicians in different specialties. The full list appears below: