Controlling Health Care Costs: Different Countries, Same Levers

The levers that control health care costs

Ask an average voter how health insurers reduce costs and, thanks to years of hostile anti-insurer rhetoric, he or she will tell you that they "deny."  Think of it as "deny^2" for both the person (who is no longer insured) as well as the procedure (which is "not covered"). 

Sophisticated Disease Management Care Blog readers know better. "Deny" stories are mostly anecdotal and that kind of misbehavior is largely prohibited. 

If insurers want to save money, there are far smarter ways to do it.  The same is true for government sponsored insurance.

After reading this Health Affairs article, the DMCB discovered that Canada, France Germany and England are using those smarter ways.

And so is the United States government.

How's that you ask?

While health care costs in other developed countries are lower than the United States, the contrarian DMCB has pointed out that today's costs are not all that important. A far more ominous trend is the rate of growth, a.k.a. "trend."  Year-after-year increases in health costs that outstrip GDP are far more threatening to governments' fiscal health, especially when budgets are being strained by other priorities, like combating terrorism, keeping tax-dodging French movie stars from moving to Belgium and helping Mr. Bieber retrieve his pet monkey from Germany.

So what are Canada, France, Germany and England doing to control health care costs?  According to the DMCB's read of Mark Stabile and colleagues' article, they are using three strategies:

1. Budget shifting: This involves individual beneficiary cost-sharing, as well as cost-shifting to private insurers and/or local governments. Ottawa, Paris, Berlin and London are also eliminating coverage of "low-value" services, devices or drugs. Yet, since backing away from universal coverage is out of the question, the central governments are also providing funding that protects low income individuals from otherwise unaffordable out-of-pocket costs.  While they're at it, coverage for "high value" services such as hospice, immunizations, dementia care (Germany) and hypertension care (France) is being expanded.

2. Budget setting: While England and France use national caps (that are flexible and subject to adjustments), all four countries have a growing reliance on regional or local price fixing as well as capitated payment arrangements. Pay-for-performance is being substituted for otherwise routine budget increases and consumers are being given their their own fixed personal spending accounts.  This helps limit the likelihood of future budget increases. 

3. Direct controls of health care supply: examples of this include cutting the number of hospital beds, eliminating coverage of certain drugs, increasing the number of primary care providers, using health technology assessment and relying on practice guidelines.

If this sounds familiar, it should.  As the DMCB noted here, the Feds are reducing Medicare's risk exposure by asking individual beneficiaries, providers and State governments to take on a greater share of health care costs.  They're also imposing budget controls by capitating providers with bundled payment and risk contracting arrangements. Last, but not least, they're controlling the supply of health care services by, for example, increasing payments to incent the adoption of electronic records and increase the pool of primary care providers.

It turns out rising health care costs are a global problem with the same set of policy options.

The "Cost Disease" of Health Care: William Baumol's Surprising Perspectives on Why It's Unavoidable and Not That Bad

Disease Management Care Blog readers know that its three favorite themes are:

1. While health care costs have gone up, patients are benefiting from relatively greater parallel increases in value. For example, compared to just a few years ago, cancer and heart attack survival rates are much better.

2. As societies grow more affluent, they are more willing to pay more for that higher value health care.  While the U.S. is an outlier in absolute per capita costs, all developed countries have the same rate of year over year cost increases.  In fact, some countries are higher health care inflation rates than the U.S.

3. The ability of government to referee the cost, value and affordability dimensions of health care is doubtful.

William Baumol's book "The Cost Disease: Why Computer Get Cheaper and Health Care Doesn't" suggests the DMCB may have two out of three correct.  The DMCB was alerted to this book thanks to an Economist review and is about half way through it.  What it's read so far is eye opening.

According Professor Baumol, a nation's health care costs should be contrasted with the rest of its economy.  Using that perspective, two national economic sectors are:

1) progressive, which uses innovations to reduce labor costs and

2) stagnant, which relies on personal services and will always have fixed labor costs.

Examples of progressive goods are automobiles and computers.  In inflation-adjusted terms, their costs have dropped precipitously. That's because fewer workers are needed per car (translating into lower labor costs), technology has made them more efficient, safe and fun.  Not only do we feel wealthy, the drop in progressive costs of transportation, housing and food means we really are more wealthy.

Examples of stagnant goods are education and health care. In inflation-adjusted terms, their costs have remained stubbornly elevated. There have been some attempts at "do it yourself" learning or treatment. There have been stunning advances in the science health care.  Distance learning is a growing option.  Yet, teaching and doctoring remain remain highly personalized, Human resource costs rule when it comes to individualized care.

In simple mathematical terms, the falling costs of the progressive goods and services translates into a shrinking fraction of an economy.  While the absolute number of computers and cars is increasing, their absolute dollar value - which is the metric used to measure a nation's gross domestic product (GDP) - is lower.  As a result, the denominator is smaller, making the percent of GDP going to health care (the numerator) relatively larger.  Health care costs aren't really going up, the cost of everything else is going down.

But wait, it gets worse. As labor gets squeezed out of the progressive economic sector, two things are happening:

a) the value of progressive manual labor is dropping, leading to falling wages for millions of unlucky Americans who are not "knowledge" workers (like engineers and technologists);

b)  because less of everyone's income will be spent on stuff like cars and computers, they'll see a greater percent of their income going toward - you guessed it -  health care and education.  That means the unlucky manual workers unable to find jobs in progressive manufacturing will find that education and health care are unaffordable.

Enter government.  Whether we planned it or not, government has traditionally supported stagnant services. This not only includes health care and education, but others that are fundamentally personal, like policing, sanitation and the military.  As a result, even if the U.S. government doesn't change a thing, it's inevitable that health care will occupy a greater portion of a nation's GDP.  And since displaced workers from the progressive sector can't afford it, it makes sense for government to expand what it's been doing all along.

Bottom line?  "Rising" health care costs are a function of its highly personal nature surrounded by an increasingly efficient economy that enables us and our government to pay for it.  Dr. Baumol calls this phenomenon "cost disease."

Dr. Baumol makes two other points:

1) The fundamental danger to society is not the rising costs of education and health care.  It's the falling progressive price of weapons (from AK-47s to nuclear bombs) and the pollution from expanded manufacturing (from oil spills to global warming).

2) Many decade's worth of past attempts to blunt health care costs as GDP rises have failed and will continue to do so.   

Bipartisan Health Care Cost Control By Diktat: Insurers or Providers or Both

According to the Kaiser Foundation, health care costs are continuing to go up. Assuming Uncle Sam is doing everything he can to "increase efficiency" and "reduce waste," what are the options that can quickly control costs?

It's simple: leverage the insurance companies or the providers or both.

1. Tell the insurance companies what they can charge: While the ability of the Feds to regulate insurance remains murky, the Affordable Care Act enables CMS to require that insurance companies "justify" a premium increase of 10% and keep their administrative costs below 15%.

What is less appreciated is that the Medicare premium support plan being championed by Republican Paul Ryan is a variation of this same strategy. Thanks to a voucher that is indexed to the rate of inflation, insurance companies would be essentially told what they can charge for the bulk of their insurance. If the health insurers need to charge more, they'll have to wrestle that out of the beneficiary.

2. Tell the providers what they can charge: For an excellent example of this at the state level, check out this article in JAMA that describes Massachusetts's just-passed law that aims to control the Bay State's $9278 per capita health spending. Large providers (with more than 15,000 patients or $25 million in revenue) are now subject to cost controls that are tied to the state's inflation rate.  Enforcement mechanisms will include "performance plan" reviews for violators, public reporting and the threat of civil penalties.

Of course, Medicare's fee schedule functionally dictates what providers can charge for their services at the federal level, but up until now, Congress has been unwilling to leverage that. While a softer and gentler approach of "upside risk arrangements" and "global fees" are being developed, the paranoid DMCB suspects that they'll be ultimately calculated to cover a predetermined charge that is supplemented with a small profit margin.

While Democrats and Republicans have been supportive of a limited number of options ultimately reflecting their ideology, the DMCB predicts that, over time and with a worsening fisc, both parties will converge on using all of the options described above.  That's because they'll have no choice.

Heluva way to achieve bipartisanship, but there you go.