Putting a Lid on Health Care Inflation Is Possible

Over the past ten years the amount that health care insurers pay out to hospitals, doctors and patients has spiraled, risng by 5% to 11% each year, from roughly $1.3 trillion in 2000 to $2.5 trillion in 2009..  Yet few patients would say that the care they receive today is twice as good as the medical attention they received in 2000.

Quite the opposite.  A Greek chorus of doctors, nurses, and hospital patients tell us that, despite pockets of excellence, the overall quality of U.S. healthcare has declined over the past decade. They are the eyewitnesses who know how chaotic our hospitals have become, and how little time doctors have to spend with patients. Both caregivers and patients are less and less satisfied with the process.  Yet health care bills continue to rise.  In 1990, we spent 12% of GDP on medical services and products.  Now we spend 17% --without comparable improvement in the health of the population.

That is why I was intrigued when Jeremy Engdahl-Johnson sent me a report from Milliman, the actuarial firm, titled “Imagining 16% to 12%.”  (Since then health care spending has jumped, so the title needs to be revised: “Imagining 17% to 12%.”)

This may well sound pie-in-the-sky-- and I’m not suggesting that we’ll do it. Still, if you believe the many observers who suggest that at least one-third of our health care dollars are squandered in ways that provide no benefit to patients, in theory, we should be able to slice spending by 25%.

Milliman calls this “Imagining the Possible.” And, as the graph on the cover of the report shows, the U.S. did spend just 12 % of GDP on healthcare in 1991.  

What has changed since then?  Some assume that an aging population has been pushing costs higher. But according to Medicare’s Office of the Actuary, from 1993 to 2009, changes in the age and gender mix of the population account for less than 0.5 % of the annual rise in national expenditures.  

Instead, the Congressional Budget Office points out, "about half of all growth in health care spending in the past several decades was associated with changes in medical care made possible by advances in technology."  Some of these new technologies have provided “enormous clinical benefits” the report acknowledges, but, as we all know, in other cases cutting-edge technologies are over-used on patients who don’t benefit from the treatments.

Moreover--and this is the part of the report that stopped me in my tracks—while medical bills climbed from 1990 to 2009,  there was one period, from 1994 to 1999,  when annual growth never exceeded 2.8%. (See chart above) And the share of GDP devoted to healthcare during those six years remained virtually unchanged.  In other words, it is possible to bring health care inflation down to less than 3% a year.

Over the course of those six years, as the bold black line on the chart below reveals (click to enlarge)   insurance premiums actually fell. At the end of the period, they began to rise, but even then they never rose more than about 5% a year—or only 2% more than the growth in reimbursements to doctors, hospitals and patients.

Since then, the combination of slower economic growth, and accelerated spending on health care has led to a stiff rise in health care outlays as a share of GDP. And as costs rose, so did premiums—up 13% in 2003.

What Happened From 1994 to 1999?

Managed care. Private insurers began to reduce our use of advanced medical technologies. As I have written in the past, sometimes they refused to pay for needed care, while in other cases they were right when refusing to authorize unnecessary tests, futile treatments, or over-priced brand-name drugs that were no more effective than generics.

Nevertheless, by the end of the 1990s, patients, doctors and the media had come to loathe the phrase “managed care”—and understandably so. Too often, insurers made their decisions based on price, rather than medical evidence. The backlash was inevitable.

Insurers reacted.  By 2000, they were tired of seeing themselves on the evening news, accused of having killed a mother of three. In some cases, they had simply refused to cover a treatment that would be worse than the disease. (Bone marrow transplants for breast cancer patients come to mind.)  Nevertheless, neither the public nor the media were in a position to know when insurers were right and when they were wrong,--and insurers were not focusing on medical evidence when making these decisions.  Meanwhile physicians were enormously frustrated by the time they spent on the phone with insurers who were trying to micro-manage their practice..

In the face of widespread  (and justifiable) suspicion that insurers were simply trying to save money, insurance companies began to throw in the towel, and say “yes” more often than “no.” They also passed the cost of “yes” on in the form of higher premiums, and so from 2000 to 2010 premiums soared, along with reimbursements for drugs, devices, hospital and physicians’ service.

Spending Levitated after 1999—but We’re No Healthier

Most observers agree that the managed care of the 1990s was a fiasco. It represented a short-sighted, ham-handed effort to control costs. For-profit insurers did not understand that making care more affordable is all about making it safer and more effective. Lift quality, and the savings will follow.

But—and here’s what we need to think about—while health care spending has  soared over the past decade, one would be hard-pressed to demonstrate that the population’s health has improved. “Unmanaged Care” (or what Dartmouth’s Jack Wennberg calls “disorganized care”) is no more successful than managed care. It just costs more.  Far more. (See Wennberg's seminal new book, Tracking Medicine, Oxford Press,2010)

In earlier decades, when health care costs were climbing, medicine was making stunning progress.  From the early 1960s into the 1980s, doors were opening right and left.  Doctors were doing things they had never done before.

But over the past ten to twenty years, progress has plateaued. Pharmaceutical companies have been producing “me too” drugs that merely put old antihistamines into new bottles . Ever-more expensive cancer drugs flood the market. But for the average patient, they don’t represent a breakthrough;  instead, they simply prolong the process of dying by a matter of weeks.

Some surgical procedures have been refined in subtle ways that represent real advances. But in the areas that make headlines, costs and risks have climbed—without producing comparable benefits.  For example, from 2002 to 2007 the number of older patients undergoing complex spinal fusions rose 15-fold, while questions about safety and efficacy multiplied.  The explosion in robotic surgery also is raising red flags highlighted in the newest issue of NEJM.  

Today, fewer Americans die of heart disease. But as a 2009 article published in the journal, Circulation, points out, most of those gains came in the late 1970s and 1980s.   Research reveals that the estimated net risk for cardiovascular disease in the US population fell sharply from the end of the 1970s (1976–1980 ) to the early 1990s (1988–1994) . But when they compare the odds of developing heart disease in the early 1990s to the net risk a decade later (1999 to 2004),  little has changed, particularly for women and middle-aged Americans.

Make no mistake: mortalities following heart attacks have dropped in recent decades, but researchers have found that  between 1975 and 1995, most of the increase in thirty-day survival following an attack “was the consequence of low-cost treatments such as aspirin, beta-blockers, angiotensin-converting enzyme (ACE) inhibitors, and thrombolytics” –not the high-tech invasive procedures that made headlines.

Since 1996, “survival gains have stagnated, while spending has continued to increase” explains the same article in Health Affairs .  Meanwhile, “regions experiencing the largest spending gains were not those realizing the greatest improvements in survival. Factors yielding the greatest benefits to health were not the factors that drove up costs.”

HealthCare Spending Shouldn’t Grow Faster than GDP

Granted, GDP growth has slowed, which is one reason why health care costs as a percentage of GDP looks so bad.  But it’s also one reason why we cannot afford to continue squandering health care dollars. (For once, Alan Greenspan may be right: I suspect we’re looking at a double-dip recession.) The other reason to rein in runaway health care inflation is that over-spending and overtreatment is hurting patients.

Meanwhile, it’s worth noting that, as the authors of “Imaging the Possible” point out:  “If the United States reduced healthcare spending to 12% of GDP instead of the current 16% we would still spend FAR more than any other country on health care.”

Where Would the Savings Come From?

The report’s projections are based on actuarial modeling and are grounded in observed best practices in healthcare management among some of the best health plans in the country.. In other words, the projections come from  experience in the "real world." Milliman argues that these savings could be achieved while insuring all Americans.  And unlike the managed care insurers of the 1990s, these health plans make decisions about what treatments to try and what drugs to prescribe based, not on cost, but on medical evidence. 

In the Milliman model, physicians’ fees are not cut. All of the savings are achieved by reducing utilization of unnecessary services, and changing how and where care is delivered.  “Certainly other scenarios for reducing healthcare spending are possible,” the authors write . “Our theme is that the right care is better care and is less expensive. Our purpose in writing this paper is to stimulate debate about how we will achieve these significant savings.”

This is a long-term goal: “a drastic change in spending will not happen quickly, but it could reverse the current pattern of waste while making available huge resources for other uses in business, creating jobs, boosting personal consumption, and allowing more government spending for important initiatives.”

They acknowledge that “to some, the 12% goal may at first be taken as a budget or an attempt to ration healthcare. The advantages and disadvantages of an enforceable national budget for healthcare spending are discussed in the Congressional Budget Office’s recent health insurance reform report.  But this is not Milliman’s intent.  “We consider 12% a target for what is possible, not a budget. We believe rationalizing care is far superior to rationing it.”

I agree. I find the idea of bringing healthcare spending down to 12% of GDP a provocative long-term target—a goal that could stimulate thinking outside of the box.

“The assumptions and models we used to project potential savings are based on observed, composite results of health benefits programs,” the authors add.   “While the shifts in utilization and spending are from actuarial models in Milliman’s Health Cost Guidelines, the results are broadly consistent with numerous published studies,  and observed variation in aggregate utilization by HMOs and insurers. Certainly, there are other ways to reach the bottom line goals we set: cutting unit reimbursement, better management of chronic disease, better preventive care, etc. These other approaches could produce different distributions of spending than those presented here.

“This report presents national average figures,” they point out. “Healthcare spending in some locales is already very efficient and there is probably little room for improvement. In other places, the potential reductions in spending are greater than those shown above." The report goes on to focus on places where we could improve care--and save health care dollars.

Long-term Care—Just One Place Where We Can Save.

“We can do a better job of caring for the elderly,” the report observes. “ Long-term care (LTC), including nursing-home and home health, is a major burden, at $282 billion or 12% of healthcare spending, most of which is funded by Medicaid. The opportunity for improvement can be realized by diverting or delaying institutional-based LTC (typically now in a nursing home) and substituting enhanced community-based LTC (in a home or assisted-living facility). Of Medicaid benefits for LTC, 56% of the people and 77% of the dollars are spent in nursing homes.

“ States vary enormously in how they spend for LTC. Oregon, a leader in reducing nursing-home use, spends 55% of its LTC dollars on home services, while Tennessee spends only 1% of its LTC dollars on home services.

“The authors of a recent AARP Public Policy Institute report summarize the potential: ‘On average, Medicaid dollars can support nearly three older people and adults with physical disabilities in home and community-based services (HCBS) for every person in a nursing home. Thus, to the extent that states provide HCBS instead of nursing-home services, this shift in service delivery can be both cost-effective and responsive to the preferences of people with disabilities.” Our model has the majority of LTC recipients receiving care in a home or home-like setting.

Looking Ahead

In the end we can’t bring our health care bill down to 12% of GDP  because our  most  efficient health care centers can’t be franchised, like so many McDonald’s, turning out the same delectable French fries—skinny, but not soggy-- across the country.   As both the Mayo Clinic and Kaiser Permanente have found, it is very difficult to replicate a medical culture with another group of doctors and patients in a different situation.   Places like Mayo in Rochester, Minnesota, and Kaiser in Northern  California have deep roots: it took many years to develop these cultures, and now they attract a self-selecting group of care-givers who are comfortable working in teams, on salary, subsuming their egos and individual personalities to one goal: evidence-based, patient centered- care. Or as Mayo’s founders put it: “The patient always comes first.”

Nevertheless,  research shows that Mayo’s outposts are significantly more efficient (providing better outcomes at a longer price) than the average medical center.  With time, I suspect that both the newer Mayo Clinics  and  the newer Kaisers will discover ways to equal the mother-ship’s results-- in  different ways, adapting to the culture where they have landed .

It is a big country. As Dr. Atul Gawande said at a National Quality Colloquium earlier thiw week: "All healhtcare is local."  Communities must learn to  create systmes that work. Health care reform will take different forms in different places.