Rising Health Care Costs and the Challenge of Coverage

July 2007

Rising health care costs affect individuals, employers, providers, and payers both private and public. Unrestrained medical cost growth makes the search for new insurance products and benefit packages more pressing, yet it is difficult to accurately price these products or predict the impact on use and overall costs.  Further, understanding what constitutes affordable coverage and how to subsidize coverage for those who cannot afford market prices is also a complex undertaking. Because both health insurers and employers must estimate medical costs to price health insurance benefits and premiums, developing accurate estimates and working to reduce costs is necessary for maintaining access to health insurance. Both challenges may detract from policymakers' efforts to expand access to health insurance.

The lack of affordable health care coverage, once a concern only of the uninsured, is increasingly burdening the underinsured and even the insured. To counter higher costs, insurance companies and employers may levy higher cost-sharing requirements or reduce the number of benefits included in the insurance plan. Consequently, individuals with employer-based coverage are taking on a greater portion of costs. Moreover, those in the individual market may be shut out by preexisting conditions or only able to afford the most basic coverage packages. While expanding access to health insurance is a high priority of policymakers and health care leaders alike-approximately 88 percent of surveyed health care leaders cited expanding coverage as "absolutely essential" or "very important"-the rising costs of health care may impede progress on such an initiative.1

In 2005, Americans spent approximately $2 trillion dollars on health care services-more than 50 percent on hospital and physician services-averaging $6,697 per person.2 While health care spending currently accounts for 16 percent of the gross domestic product (GDP), researchers estimate that aggregate health care spending may exceed 20 percent of the GDP by 2015.3 Contributing to this increased spending are higher medical costs paid by government programs-such as Medicare and Medicaid-employers, and insured and uninsured individuals, as well as increased utilization of medical care services. Further exacerbating health care spending, as the baby boomer generation ages the demand for medical care will increase.

Inappropriate medical care, insufficient preventative services, increased prevalence of chronic diseases such as diabetes and heart disease, and the administrative cost of providing health insurance all contribute to cost growth. Technological advancements driven by the consumers' demand for the newest and best care are one of the major cost drivers.4 The cost of treating heart attacks, for example, increased by $10,000 per case (or 4.2 percent) annually between 1984 and 1998 due in part to new cardiac technologies.5 High cost technological innovations may improve the efficacy of treatment and become the standard of care, or they may reduce the cost of treatment and thus augment the number of people receiving the services.6 Moreover, new diagnostic technologies may increase the number of individuals diagnosed with medical conditions, increasing the number treated and adding to overall health care spending.7 Compounding the demand for high cost technologies is the fact that such care is covered by insurance; oftentimes, neither physicians nor individuals weigh the cost of the technology with the benefit of treatment.8 Peter Neumann and colleagues at Harvard School of Public Health, however, conducted a HCFO study examining coverage decisions for new technology and whether such decisions are based on cost-effective analysis. Additionally, researchers sought to determine "best practices" for assessing new medical technologies.

To counter increasing medical costs, researchers are examining the benefits of greater price transparency, consumer-driven health plans, evidence-based medicine, information technology (IT), and disease management.9 When queried, 75 percent of surveyed health care leaders believed that reducing unnecessary medical care would be "extremely/very effective" in decreasing costs while improving quality.10 Widespread use of evidence-based guidelines, for example, may decrease unnecessary medical care; a 2006 study found that physicians who do not use evidence-based guidelines contribute to millions of dollars of unnecessary spending.11 Moreover, individuals enrolling in consumer-driven health plans may be more conscious of medical costs and the value of treatment. For example, in their HCFO project, Judith Hibbard, Dr. P.H., and colleagues at the University of Oregon are currently studying whether consumers enrolled in consumer-driven health plans actually make informed and cost-effective health care decisions. In addition, the researchers hope to measure these enrollees' satisfaction with their medical care and the related cost of their care.

While 2008 projections suggest that the relative growth in health care costs will decrease, more research is necessary to determine how to best estimate and mitigate absolute costs, which remain high, and evaluate which strategies (ie. disease management, cost-effectiveness analysis, or consumer-driven health plans) most effectively control escalating costs.12 Addressing such issues and implementing counter strategies may allow policy makers to draft proposals that maintain lower health care costs while increasing access to health insurance.

Currently, HCFO is soliciting research proposals examining health care cost growth in the context of expanding coverage to increase our portfolio in this area.13 In addition, the following selected grants from HCFO's portfolio may help inform policy makers who are working to address the problem of rising health care costs. For other cost-related grants see www.hcfo.net.

Title: Evaluating Cost Efficiency of Specialist Physicians
Institution: University of Southern Maine
Principal Investigator: J. William Thomas, Ph.D.
Grant Period: April 2007 - March 2009

The researchers will analyze alternative strategies for measuring specialist physician cost efficiency. Accurate measures of physician cost efficiency allow consumers to make more informed decisions, while helping health plans make better choices about which physicians to include in their networks. Specifically, the researchers will explore the: (1) feasibility of using multi-plan claims databases for cost efficiency measurement; (2) need for risk adjusting episode expected costs to account for patients' comorbidities; (3) methodology for dealing with cost outlier episodes; (4) methodology for attributing responsibility for individual episodes to individual physicians; (5) minimum episode sample sizes required for cost efficiency measurement; (6) methodology for case-mix standardization; (7) influence and availability of pharmaceutical claims on cost efficiency measurement; and (8) suitability of ratio of observed to expected cost as a cost efficiency metric. The objective of the study is to develop standard methods for measuring the cost efficiency of specialist physicians, providing a broad range of stakeholders with reliable means for developing physician networks, assigning tiers, and implementing better public reporting.

Title: Physicians' Responses to Variations in Medicare Fees for Specific Services
Institution: Center for Studying Health System Change
Principal Investigator: James D. Reschovsky, Ph.D.
Grant Period: March 2007 - June 2008

The researchers will examine how physicians' provision of specific medical services to Medicare FFS beneficiaries responds to variations in Medicare physician fees for those services, physicians' characteristics, and to local market factors. The study will test whether the quantities of specific services physicians provide to their Medicare fee-for-services patients are:1) positively related to the Medicare fee for each service; 2) inversely related to the fees paid by private insurance and to the level of demand from non-Medicare patients; and 3)positively related to indicators of physicians' incentives to "induce demand." Potential outcomes include: 1) indicating the percentage change in service volume for a particular fee change; 2) estimating how service volumes vary with local market conditions; 3) characterizing physician opportunities and underlying incentives to induce demand; and 4) identifying services for which service-specific fee adjustments might be an effective tool to constrain unnecessary use. This project expands upon a previous study by the applicants that investigated overall provision of total Medicare services by physicians. The objective of the project is to fill a gap in past and current physician payment research by assessing if changing relative prices of specific services will contribute to meeting the broad policy goals of discouraging the provision of services that unnecessarily add to cost growth without improving quality or outcomes.

Title: Medical Spending and Health of the Elderly
Institution: The Urban Institute
Principal Investigator: Jack Hadley, Ph.D.
Grant Period: December 2006 - May 2008

The researchers will assess the marginal contribution of increased medical spending on health status. Specifically, they will explore whether: (1) Elderly people who spend more on medical care have better health outcomes than people who spend less; (2) The marginal effect of medical care spending on health varies across subpopulations of the elderly, stratified by demographic characteristics; and (3) whether Medical spending has an effect on health at the margin. The project will build upon prior research, which examined whether Medicare beneficiaries who live in geographic areas with higher average spending have better health outcomes, but did not address the impact on individuals. The objective of this project is to help guide policymakers' decisions about policy options to reduce health care spending.

Title: Impact of the Washington State Diabetes Collaborative on Patient Health and Economic Outcomes
Institution: Washington State Department of Health
Principal Investigator: Amira El-Bastawissi, Ph.D.
Grant Period: July 2006 - February 2008

How do the clinics and primary care physicians participating in Collaborative III of the Washington State Diabetes Collaborative affect the health and economic outcomes of diabetic patients? The collaborative combines elements from Collaboratives of the Institute for Healthcare Improvement and the Chronic Care Model developed by Edward Wagner and colleagues. The researchers would capture the later-stage results of the collaborative, "thus offering an impact evaluation of a mature system-change model." In particular, the researchers would explain how different components of the collaborative approach to diabetes care management directly affect health and economic outcomes (utilization and costs). The objective of the study is to better inform health plans, public payers, health care providers, and employers about the economic impact of the collaborative, to inform their quality improvement, benefit design, and payment decisions for diabetic patients.

Title: Involving Consumers in Physician Choice: Making Data into Useable Information for Chronically Ill Patients in Consumer-Directed Health Plans
Institution: Massachusetts General Hospital
Principal Investigator: David Blumenthal, M.D.
Grant Period: March 2006 - August 2007

What tools will consumers need to help select high performing physicians, within CDHPs? Physician performance data is one of the tools that can be used to help consumers make these decisions. However, there are important opportunities and challenges facing consumer-directed health plans (CDHPs) trying to engage consumers in using physician performance data (PPD). The specific aims of the project are: 1) to develop methods for informing consumers about physician clinical performance; 2) to test the effectiveness of these methods in helping consumers with chronic conditions in CDHPs to make an informed choice of primary care physician (PCP); 3) to explore how consumer characteristics affect their ability to understand PPD and their response to that data. The objective of this study is to understand how and whether PPD can be appropriately and effectively used in CDHPs.

Title: Strategies to Reduce Health Care Providers' Administrative Burden Related to Quality Performance Measurement and Reporting
Institution: Center for Studying Health Systems Change
Principal Investigator: Paul Ginsburg, Ph.D.
Grant Period: February 2006 - July 2007

How do quality reporting requirements affect hospitals? What strategies do hospitals and quality reporting organizations use to minimize burden? What forces facilitate or impede these efforts? Using a case study approach and building on the HSC's ongoing tracking of local health care markets across the country, the researchers will focus on four communities ( Boston, Indianapolis, Seattle, and Orange County, CA ) with a high level of reporting and performance measurement activity. In these communities, the researchers will: (1) confirm the programs that hospitals reported participating in during the Round 5 site visits; (2) confirm what the reporting requirements are for each program based on background work for the project; and (3) indicate the ways in which hospitals believe reporting requirements of the programs differ enough to meaningfully increase burden. The objective of this study is to explore the burden on hospitals of quality reporting in four communities, extrapolate lessons learned for other communities with similar attributes, and draw implications for policymakers and private sector decision makers seeking to reduce administrative burdens associated with this type of reporting.

Title: Costs and Benefits to Physician Practices of Interactions with Health Plans
Institution: University of Chicago
Principal Investigator: Lawrence Casalino, MD, Ph.D.
Grant Period: October 2005 - July 2007

What are costs to physicians of administrative complexity in their interaction with payers? The researchers are examining the administrative burden associated with physician practice interactions with health plans using three approaches: (1) they are developing a national estimate of the administrative "costs" for U.S. private physician practices generated by their interactions with multiple health plans/payers; they will simultaneously develop estimates of the costs for analogous interactions in Canadian physician practices and for Kaiser Permanente practicing physicians; (2) they are also developing order of magnitude estimates of the "benefits" of administrative complexity; and (3) they are surveying U.S. health plan and physician practice leaders to determine if there is common ground on eliminating or simplifying administrative complexity. The objective of this project is to provide the best estimate to date of the costs to physicians of administrative complexity in their interaction with payers and to give a qualitative sense of the extent to which physicians' costs associated with administrative complexity are balanced with benefits.

Title: Administrative Costs Associated with Third Party Payment
Institution:University of California, San Francisco
Principal Investigator: Harold Luft, Ph.D.
Grant Period: September 2005 - July 2007

What are the functional components and attendant costs of payment administration in an outpatient setting, the Palo Alto Medical Foundation (PAMF). They are examining the procedures to obtain payment for delivered services, as well as activities required by insurers, such as credentialing and reporting. The researchers are addressing two research questions: (1) what administrative functions are performed, and at what cost, to obtain third-party payment in a large, multi-specialty medical group practice; and (2) how would altering insurance or payment mechanisms affect administrative functions and costs? Because the PAMF has three divisions with notable operating differences, the researchers have a unique opportunity to explore what, if any, advantages may accrue from incorporating health information technologies into billing and insurance related functions within the current insurance system. The objective of this project is to provide policymakers with estimates to assess the cost implications of insurance reform options, ranging from specific changes, such as standard billing, to broad reforms such as expansion of public insurance.

Title: Administrative Simplification Challenges and Opportunities: A Physicians Organization Perspective
Institution: Massachusetts General Physicians Organization
Principal Investigator: Gregg S. Meyer, MD
Grant Period: August 2005 - July 2007

How does administrative complexity affect a large physician organization? The researchers are examining administrative complexity from the perspective of a large physicians organization, the Massachusetts General Physicians Organization (MGPO). They are addressing the following research questions: (1) what is the magnitude of the burden and growth trajectory of administrative complexity on physicians; (2) which components account for the greatest proportion of the burden, and which are the most amenable to change; (3) how is administrative burden reflected; (4) who currently bears the burden and how can that burden be made more transparent; (5) what components of complexity do and do not offer value; (6) what is the impact of quality, particularly pay for performance contracting; (7) which components are best addressed by information technology and what has been the impact of HIPAA standards; (8) what are the potential savings through simplification and standardized processes; and (9) what processes will facilitate addressing complexity at the physician services level? The objective of the project is to examine why market forces have increased, rather than mitigated, administrative complexity and examine whether non-market-based solutions may offer opportunities for addressing the problem.

Title: How Valid are the Assumptions Underlying Consumer-Driven Health Plans?
Institution: University of Oregon
Principal Investigator: Judith Hibbard, Dr.P.H.
Grant Period: May 2004 - January 2008

How valid are the assumptions underlying consumer-driven health plans? The researchers propose to use both qualitative and quantitative methods to examine the key assumption underlying consumer-driven health plans: if consumers are given financial incentives, choices and information to support these choices, they will take charge of their health and health care and make prudent choices. Working with Definity Health Plan and a large employer (which offers their employees a choice of Definity and a PPO option), the researchers are following one cohort of employees who enroll in Definity and another cohort who enroll in a PPO plan. The objective of the study is to compare the knowledge, use of information, satisfaction with care, cost-effective utilization, and cost of care for persons enrolled in Definity and the PPO over time.

Title: Cost Effectiveness, Quality and the Future of Medical Technology Assessment
Institution: Harvard School of Public Health
Principal Investigator: Peter Neumann
Grant Period: July 2002 - June 2004

How does Medicare assess and make coverage decisions for new medical technologies? First, the researchers will conduct an in-depth descriptive and mutli-variate explanatory analysis of 100 CMS coverage decisions over the past 12 years. They then will compare Medicare's processes and decisions with those of other health technology assessment (HTA) organizations. Specifically, the researchers will examine 6 key questions: 1) What technologies has Medicare formally assessed in the past decade? 2) What are the key determinants of Medicare coverage decisions? 3) Have coverage decisions been consistent with evidence of societal cost-effectiveness? 4) Have the same technologies been assessed by other HTA organizations? 5) What "best practices" for technology assessment surface from an investigation of key technology assessment organizations in the U.S. and abroad? and, 6) What role can cost-effectiveness play in future assessments in the U.S. (given data limitations, multiple societal objectives, and likely political opposition)? The objective of the study is to inform decision makers about HTA processes and to reveal "best practices" about technology assessment as they consider whether to cover new medical technologies.

Title: The Effect of Price on Health Plan Choices of Retirees
Institution: University of California Irvine Graduate School of Management
Principal Investigator: Thomas C. Buchmueller, Ph.D.
Grant Period: March 2002 - February 2003

What is the price sensitivity and related health plan choices of Medicare-eligible retirees? Building on previous HCFO-funded research and analyzing data from a large western employer, the researcher analyzed the following: 1) What is the effect of out-of-pocket premiums on the health plan choices of Medicare-eligible retirees? 2) How price-sensitive are early retirees (under 65)? and 3) How responsive are retirees to financial incentives for declining coverage? The objective of this study was to educate decision makers who develop Medicare reforms by providing credible estimates of the price sensitivity of Medicare beneficiaries. In addition, the researcher sought to inform policymakers about how retirees respond to financial incentives and the impact this response might have on how insurance costs are allocated. 

1 Mahon, M. "New Congress Should Focus on Covering Uninsured, Reducing Health Costs, According to New Health Care Opinion Leaders Survey," Commonwealth Fund, January 8, 2007. Also see www.commonwealthfund.org/newsroom/newsroom_show.htm?doc_id=439575
2 "Covering Health Issues 2006-2007," Alliance for Health Reform, 2007. Also see allhealth.org/sourcebookcontent.asp?CHID=17
3 Government Accountability Office, Health Care Spending, Pubic Payers Face Burden of Entitlement Program Growth, While All Payers Face Rising Prices and Increasing Use of Services, Testimony of A. Bruce Steinwald, Director, Health Care before the Subcommittee on Military Construction, Veterans Affairs, and Related Agencies, Committee on Appropriations, House of Representatives, GAO-07-497T, February 15, 2007. Also see www.gao.gov/new.items/d07497t.pdf
4 "Covering Health Issues 2006-2007," Alliance for Health Reform, 2007. Also see www.allhealth.org/sourcebookcontent.asp?CHID=17
5 Government Accountability Office, Health Care Spending, Pubic Payers Face Burden of Entitlement Program Growth, While All Payers Face Rising Prices and Increasing Use of Services, Testimony of A. Bruce Steinwald, Director, Health Care before the Subcommittee on Military Construction, Veterans Affairs, and Related Agencies, Committee on Appropriations, House of Representatives, GAO-07-497T, February 15, 2007. Also see www.gao.gov/new.items/d07497t.pdf
6 Cutler, D. and M. McClellan. "Is Technological Change in Medicine Worth It?" Health Affairs, Vol. 20, No. 5, September/October 2001, pp 11-29.
7 "Covering Health Issues 2006-2007," Alliance for Health Reform, 2007. Also see allhealth.org/sourcebookcontent.asp?CHID=17
8 Government Accountability Office, Health Care Spending, Pubic Payers Face Burden of Entitlement Program Growth, While All Payers Face Rising Prices and Increasing Use of Services, Testimony of A. Bruce Steinwald, Director, Health Care before the Subcommittee on Military Construction, Veterans Affairs, and Related Agencies, Committee on Appropriations, House of Representatives, GAO-07-497T, February 15, 2007. Also see www.gao.gov/new.items/d07497t.pdf
9 "Covering Health Issues 2006-2007," Alliance for Health Reform, 2007. Also see allhealth.org/sourcebookcontent.asp?CHID=17
10 "Behind the Numbers," PricewaterhouseCoopers' LLC, 2007. Also see pwchealth.com/cgi-local/hregister.cgi?link=reg/numbers2008.pdf
11 "Health Care Opinion Leaders: Views on Controlling Rising Health Care Costs," The Commonwealth Fund, January 2007. Also see commonwealthfund.org/chartcartcharts/chartcartcharts_show.htm?doc_id=440852
12 Ginsburg, M. "Rearranging the Deck Chairs," Health Affairs, October 24, 2006, pp 537-9.
13 "Behind the Numbers," PricewaterhouseCoopers' LLC, 2007. Also see pwchealth.com/cgi-local/hregister.cgi?link=reg/numbers2008.pdf
14 For information on HCFO's open solicitation for proposals on health care costs, see hcfo.net/specialtopic-healthcarecosts.htm