BPC’s Health Care Cost Drivers Report

BPC’s new initiative plans to produce a bipartisan package of health care cost containment options

On September 20, 2012, the Bipartisan Policy Center (BPC) released a new report, What Is Driving U.S. Health Care Spending? America’s Unsustainable Health Care Cost Growth. The report identifies an extensive list of health care cost drivers, ranging from structural barriers to reducing costs within the current system to the more dynamic, changing aspects that will impact the overall growth rate of health care spending.

The report is the first product of BPC’s new Health Care Cost Containment Initiative, which brings together the leaders of BPC’s Health Project and Debt Reduction Task Force: former Senate Majority Leaders Tom Daschle and Bill Frist, former Senator Pete Domenici and former Congressional Budget Office Director Dr. Alice Rivlin. Over the next several months, the initiative will seek approaches to contain health care cost growth on a system-wide basis, while enhancing health care quality and value. The effort will ultimately produce a comprehensive, bipartisan package of cost containment strategies.

In providing a basic overview of the drivers of health care cost growth, this publication serves as an analytical starting point for BPC’s work on health care cost containment. The main findings of the report are outlined below.

Background

In 2010, the United States spent over $2.6 trillion on health care, representing roughly 18 percent of gross domestic product (GDP). Other advanced nations are able to provide health care services for significantly less – health spending in the U.S. is far higher than the United Kingdom (9.6 percent of GDP), Germany (11.6 percent) or Japan (9.5 percent). Despite this high level of health care spending, the United States lags on many measures of health care outcomes and quality.

Over just the last 30 years, the percentage of our GDP devoted to spending on health care has doubled. This rapid growth in health expenditures creates an unsustainable burden on America’s economy, with far-reaching consequences. Because of this cost, businesses that provide health insurance to their workers are less competitive internationally and have fewer resources to invest in innovation and new technologies. For employees, the increasing cost of employer-provided health insurance contributes to the stagnation of middle class wages, because salary increases are supplanted by an employer’s subsidies toward health care benefits. Increasing spending on government health care programs – primarily Medicare and Medicaid – consumes a growing portion of federal and state budgets, crowding out other priorities while also increasing public debt and reducing private investment in the economy.

Broadly, the drivers of U.S. health care cost include:

Health Care Financing and Delivery

• Fee-for-Service: Reimbursement under the fee-for-service (FFS) model generates a strong incentive to perform a high volume of tests and services, regardless of whether those services improve quality or contribute to a broader effort to manage care.
• Fragmentation of Care Delivery: Providers are paid for volume rather than patient outcomes, generating little financial incentive to coordinate with others to deliver more efficient care.
• Administrative Burden: Our complex system of payment and delivery leads to increased paperwork and the need for greater administrative resources, raising provider and payer costs.

Population Needs for Care

• Aging: The aging of the population will significantly impact the federal budget and contribute to approximately 0.5 percentage points per year in spending growth.
• Chronic Disease: The rapidly increasing number of individuals with chronic disease account for a disproportionate percentage of overall health spending.

Advancing Medical Technology

• Medical Technology: Advances in medical technology can both increase health system efficiency and encourage unnecessary utilization of expensive treatments in FFS.

Insurance Design

• Tax Treatment of Health Insurance: The employer-sponsored health insurance tax exclusion encourages increasingly generous benefit designs and represents a significant loss in revenue for the federal government.
• Utilization and Prevention: Access to health care services with little cost-sharing encourages higher care utilization and leads to increased spending.

Lack of Transparency in Cost and Quality Information

• Limited Consensus on Standards of Care: Without reliable information that enables a fair comparison of health care quality and outcomes, patients and clinicians are ill-equipped to utilize the best, most cost effective treatments.
• Cultural and Institutional Influences: Cultural biases often favor more and prolonged care, regardless of its effectiveness.

Competition and Consolidation

• Choice and Market Forces: Imbalances in market power due to regional variation as well as increasing provider and payer consolidation hinder market forces from limiting high prices.
• Provider Consolidation: Growing consolidation among providers can improve the delivery of care, but misuse of market power to increase the price of services is a risk.
• Insurance Industry Consolidation: Larger insurers are gaining market share across the nation. Potentially, insurers could use this power to negotiate lower provider reimbursement.
• Unit Prices: The U.S. pays higher prices for health services, which leads to higher spending.

Legal and Regulatory Environment

• Legal Barriers: The current U.S. legal and regulatory environment drives up costs to our health care system by preventing transition to more cost-effective systems of care.
• Medical Malpractice: Fearing malpractice lawsuits, many physicians significantly drive up costs to our health care system by ordering unnecessary tests and treatments.
• Fraud and Abuse: Fraud and abuse contributes to wasteful spending in both federal and private sector health programs.

Health Professional Workforce

• Scope of Practice Restrictions: Utilizing a physician for a service that another professional is able to effectively and safely provide is a missed opportunity to utilize a lower cost provider.
• Health Professional Workforce Shortages: Shortages or maldistribution of health professionals can drive patients to seek care from higher cost providers.
• Clinical Specialization: The high ratio of specialty physicians in the U.S. can encourage utilization of higher cost services.
• Medicare and Medicaid Participation: Patients that cannot regularly access care via a physician office visit may seek treatment from higher cost providers, such as hospital emergency departments.

Conclusion and Next Steps

The drivers of health care cost growth are complex and multi-faceted. Just as no single driver is responsible for our high and rising health care costs, no single policy solution will be adequate to meet this challenge. For this reason, the BPC Health Care Cost Containment Initiative plans to produce a comprehensive, bipartisan package of health care cost containment options that, if implemented together, could reduce system-wide health care costs, slow cost growth and improve the efficiency and quality of care in the United States.

Full paper and references are available here.