Controlling Health Care Costs

February 2012

Recently, the Agency for Healthcare Research and Quality (AHRQ) released a study showing the concentration of health care costs among a relatively small proportion of the population.Writing in The Atlantic Monthly and describing the study results, Jordan Weissmann notes that the top 5 percent of spenders accounted for about half of all health care spending in the United States and had an annual average of $35,829 in medical bills. By contrast, the bottom 50 percent of spenders were responsible for just over 3 percent of health care expenditures, averaging $232 in annual costs per person. Most of the high spenders were in the same group from year to year and were disproportionately older, in fair or poor health, and more likely to have public health insurance than the general population. 

This concentration of health care spending in a relatively small number of individuals presents both challenges and opportunities for public and private policymakers. On the one hand, the same cohort are typically high spenders for several years, and their severe medical problems may be particularly resistant to interventions to control costs. On the other hand, the large concentration of spending in a small group presents an opportunity to examine the factors that contribute to high spending and to develop interventions that could have a large impact on controlling costs. 

HCFO's portfolio of funded research offers additional insights into the nature of health care costs and the challenge of controlling their increase and improving value for money spent. The relevant studies include:

1. Cost and Efficiency in Treating High-Cost Medicare Beneficiaries: The Role of Physician Practice and Health System Factors (March 1, 2008-September 30, 2011). James D. Reschovsky, Ph.D., The Center for Studying Health System Change. In a multi-phase project, the researchers examined key physician practice and market characteristics that may contribute to high costs and inefficient care in the Medicare program.  They also examined possible sources of geographic cost variations for high-cost beneficiaries and the extent to which these variations reflect differences in patient characteristics or supply-related factors and practice patterns of providers in a particular region. To date, this grant has produced one publication:

Reschovsky, J.D. et al. “Following the Money: Factors Associated with the Cost of Treating High-Cost Medicare Beneficiaries,” Health Services Research, Vol. 46, No. 4, 2011, pp. 997-1021. Reschovsky and colleagues found that among high-cost beneficiaries, health was the predominant predictor of costs, with most physician and practice, and many market factors (including provider supply), insignificant or weakly related to cost. They concluded that health reform policies currently envisioned to improve care and lower costs may have small effects on the high-cost patients who consume the most resources. Instead, developing interventions tailored to improve care and lower cost for specific types of complex and costly patients may hold greater potential for “bending the cost curve.”

2. Medicare Spending, Disparities, and Returns to Health Behaviors (March 1, 2008-February 28, 2010). Bruce Stuart, Ph.D., University of Maryland at Baltimore. Stuart and colleagues examined persistently low-cost Medicare beneficiaries and determined the extent to which health behavior, preventive services, race, and socioeconomic status (SES) are related to low spending. The objective of the project was to identify which disease states and beneficiary segments show the greatest promise for improved compliance and persistency in use of preventive therapies. To date, this grant has produced one publication:

Stuart, B. et al. “Does Medication Adherence Lower Medicare Spending Among Patients with Diabetes?Health Services Research, Vol. 46, No. 4, July 2011, pp. 1180-1199. Stuart and colleagues’ analyses explored the role of health behaviors in combination with medication adherence to control costs. They concluded that higher medication adherence among diabetic Medicare beneficiaries resulted in lower medical spending. At the margin, Medicare savings exceed the cost of the drugs.

3. Sources of Health Care Cost Growth (March 1, 2008-November 30, 2010). Laurence C. Baker, Ph.D., Stanford University, and Anne B. Royalty, Ph.D., Indiana University. The researchers studied the sources of cost growth among the privately insured and examined how changes in prices and changes in the number and types of services have differentially affected different categories of spending and different demographic groups. They explored which policies or benefit designs will be more effective in reducing spending, as well as whether costs are driven more by increased utilization of certain types of services or by increases in the prices of particular services. The objective of this study was to provide information for policymakers to design interventions to reduce health spending in ways that benefit consumers.

Bundorf, M.K. et al. “Health Care Cost Growth among the Privately Insured,” Health Affairs, September/October 2009. The researchers examined spending growth among the privately insured between 2001 and 2006, separating the contributions of price changes from those driven by consumption. Most spending growth was driven by outpatient services and pharmaceuticals, with growth in quantities explaining the entire growth in outpatient spending and about three-quarters of growth in spending on prescription drugs.

4. Can Disease Management Control Costs? (March 1, 2008-February 28, 2010). Randall Brown, Ph.D. and Deborah N. Peikes, Ph.D., Mathematica Policy Research. Brown and Peikes tested the ability of disease management and care coordination programs to control health care costs, examined which features make certain programs effective, for which target populations, and how they can be replicated. The objective of this study was to help decision makers determine whether to offer disease management and care coordination to Medicare beneficiaries, as well as chronically ill patients with commercial insurance and Medicaid, and provided information about how best to implement this intervention.

Peikes, D. et al. “Effects of Care Coordination on Hospitalization, Quality of Care, and Health Expenditures Among Medicare Beneficiaries,” JAMA, Vol. 306, No. 6, 2009, pp. 603-618. Studying eligible fee-for-service Medicare patients (primarily with congestive heart failure, coronary artery disease, and diabetes, Peikes and colleagues sought to determine if care coordination programs reduced hospitalizations and expenditures. They found that 13 of 15 programs studied showed no significant differences in hospitalizations.  They concluded that viable care coordination programs without a strong transitional care component are unlikely to yield net Medicare savings. Programs with substantial in-person contact that target moderate to severe patients can be cost-neutral and improve some aspects of care.

While the grants above provide a sample of HCFO-funded studies most relevant to the concentration of health care costs among a minority of individuals, other HCFO studies that examine costs include:

How Does Fragmentation of Care Contribute to the Costs of Care?

Grantee Institution: Harvard School of Public Health

Principal Investigator: Eric Schneider, M.D.

Grant Period: March 1, 2008-February 28, 2010


Variation in Health Care Cost Growth

Grantee Institution: Harvard Medical School 

Principal Investigator: Michael Chernew, Ph.D.

Grant Period: March 1, 2008-August 31, 2009


Small Area Variation in Medicaid Utilization and Expenditures: Implications for Cost Containment and Quality of Care

Grantee Institution: University of California at San Diego

Principal Investigator: Richard Kronick, Ph.D.

Grant Period: March 1, 2008-December 31, 2009.


Comparing the Cost Effectiveness of Chronic Care Between Medicare Advantage and Medicare FFS Beneficiaries

Grantee Institution: University of Minnesota

Principal Investigator: David J. Knutson, M.S. and Beth A. Virnig, Ph.D.

Grant Period: July 1, 2008-October 31, 2011


Medical Spending and the Health of the Elderly

Grantee Institution: George Mason University

Principal Investigator: Jack Hadley, Ph.D.

Grant Period: October 1, 2007-June 30, 2009