Our (Limited) Policy Toolbox for Slowing Health Care Spending Growth

In my last post, I examined the causes of health care spending growth and discussed the factors that underlie the variation in spending both overtime and across countries. In this post, I want to focus on the broad strategies available to slow the growth in health care spending. The goal of this post is not to advocate for one policy tool or another. Rather, it is to say what options are available to policymakers facing firm fiscal realities.

Nearly every developed country is under substantial pressure to slow the growth in health care spending. However, as we have seen, while virtually every country has pledged to spend less, few have been successful. Here, the political constraints and popular sentiments in each country limit the tools that are at policymakers’ disposal. More than that, efforts to spend less are hampered by institutional inertia and entrenched interests. As Princeton economist Uwe Reinhardt has argued, if we framed a $1,000 reduction in health care spending as a $1,000 reduction in income for those currently working in the health system, it becomes vastly clearer why the task in front of us is so difficult.

So, in what follows, I will outline the strengths and weaknesses of the four main tools we have at our disposal to slow health care spending. More than that, I would also like to shift the debate from simply talking about spending less towards thinking about how to increase the productivity and value in our health systems. As I’ll discuss, we can certainly come up with slash and burn policies that will lead to short-term reductions in health care costs. However, the real challenge is to introduce policies that induce savings gleamed for improvements in productivity, where in the long run, patients get better outcomes at lower prices.

One important caveat: for the save of brevity, I have not discussed the economic ramifications of improvements in public health. That surely could be a topic for my next post.

1) Brute force price reductions: The first tool we can use is to simply lower the reimbursement rates that the government and or insurers pay to providers for care. Indeed, one of the main sources of savings in the Affordable Care Act comes from reductions in providers’ Medicare reimbursement rates that are being introduced over the next decade. This will no doubt produce short-term savings, but it’s unlikely that this will greatly alter the overall trajectory in the long term.

Here, providers are likely to respond to reductions in price by simply increasing their activity by, for instance, carrying out more office visits of shorter duration. Further, there is a real concern that as price goes down, so too will quality. For example, there is strong evidence that when the prices for heart attack care are set below hospitals’ marginal costs, then mortality rates tend to increase. Finally, particularly in the U.S., there is a risk that these sorts of price reductions will lead to cost shifting. Here, as policymakers lower Medicare reimbursement rates, it is likely that hospitals will simply charge higher prices to privately funded patients.

2) Rationing: The second option available to policymakers is to ration care and restrict specific procedures and medications or limit the overall quantity of care that is provided. Here, when rationing decisions are tied to evidence on the cost-effectiveness of certain medication, the idea is that health systems will only fund care that is viewed as productive. For example, in England, the National Health Service will only fund care that costs less than $60,000 for each quality adjusted life year gained. So, cancer drugs like Avastin, which have hugely high prices, but only have a small impact overall survival, are less likely to be funded by the public system (and individuals need to pay out of pocket to receive them).

Clearly, rationing is a political non-starter in the U.S. However, there are appealing aspects to it. First, if we side-step the emotive aspects of rationing, I think we can all agree that it makes no sense to spend taxpayers’ money on health care that doesn’t produce dividedness. The question then is how we measure whether a particular procedure or medication has value and this is where it quickly becomes clear that, at the moment, cost-effectiveness research is a very imperfect science. Second, we need to make rationing decisions in every health system. Whereas the U.S. often rations on price, the U.K. rations on cost-effectiveness research. Here, it is really a political decision over which of the two forms of rationing we find more palatable.

Comparative effectiveness research is the less controversial cousin of cost-effectiveness research. Comparative effectiveness research seeks to compare the efficacy of various treatments for a single condition. Here, comparative effectiveness research can be used to inform purchasing decisions so that funding is only directed towards care that is more likely to produce benefits.

3) Consumer-Directed Health Care: A third tool often touted to reduce spending is consumer directed health care. This is predicated on the idea that having insurance or government provided health care creates distortions in what individuals choose to consume. This is a fair assertion. We know that when individuals don’t have to pay for what they consume, they tend to consume more than they would were they to have to pay for the entire price. Consumer-directed health care is designed to force individuals to have more skin in the game and have to pay a larger share of their health care bills themselves, under the assumption that this will make them become more cost and quality focused. Indeed, consumer-directed health care policies form a key component of Paul Ryan’s Medicare proposals.

Clearly, there is scope for increasing the use of consumer-directed health care, but the question is how big an impact it will have and how to harness it effectively.

The challenge with consumer-directed health care is two-fold. First, we need to think about what percentage of total health care spending is likely to be spent on frivolous items, which individuals seemingly would not purchase if they faced the full purchasing price. Here, we know that this is probably a fairly small share of overall health care spending. Approximately 80 percent of our health care dollars are spent by 20 percent of the population, who for the most part are very sick and elderly. Often, this is for spending on services, like treatment for heart attacks or intensive care visits, which individuals would likely still consume even if they were forced to pay for. In short, it is the big ticket items in health care, over which consumers have little discretion, which is really driving overall spending. Second, we know that individuals do not do a great job differentiating between effective and ineffective care. As a result, there is a risk at that as we force individuals to pay a larger share of their own health care; they may potentially reduce their consumption of both necessary and unnecessary services.

As a result, crude consumer-directed health care is unlikely to yield substantial productivity gains. However, price signals could be an important tool to steer patients towards effective services. Here, for example, insurance companies could offer no co-pays at high- quality facilities with lower readmissions and infections rates (which lead to higher costs) and make hospitals with lower quality subject to a co-pay.

4) Information and Incentives Reforms: Fourth, there are policies that what we can refer to as information and incentives reforms. Here, the idea is to measure performance, like patient outcomes and costs, and link the performance on these measurements to financial incentives. These incentives can be directly created by the government or private payers, either in the form of performance management, pay for performance programs, or competition.

Examples of these types of information and incentives programs include efforts to introduce fixed price hospital competition in England, some of the Medicaid Pay 4 Performance pilots introduced recently and plans, under the new health care law, to not pay providers for adverse events like readmissions and infections. Here, the idea is to link providers’ financial success to the success of care they deliver based on a series of quality metrics.

I find these types of programs the most intuitively appealing. However, it is important to point out that in practice, these policies can be difficult to implement. For starters, it has historically been very difficult to measure health care providers’ performance. Likewise, the incentives created by these sorts of reforms are often more subtle than they appear at first blush. For example, while evidence clearly suggests that quality competition between hospitals improves patient outcomes, price competition tends to have the opposite effect. Price competition tends to not only lead to lower hospital prices, but it also leads to lower hospital quality.

Likewise, pay for performance programs can lead to gaming or subversive activity.
Nowhere has this been clearer than in the English NHS, where hospitals were punished financially based on the number of patients waiting over four hours for care. Immediately after the program was introduced, waiting times dropped but it became clear that hospitals were simply admitting patients to the hospital, which they could not treat within the four-hour window.

Concluding thoughts
There is clearly no silver bullet for reducing health care spending. When the Affordable Care Act was introduced, critics claimed that it did not include enough measures to substantially slow spending growth. Proponents of the bill and those within government argued that it included virtually every policy that those in the field could think of to bend the cost curve. I believe both the critics and proponents of the bill were correct. The bill did include most of the frequently discussed policy tools to reduce health care spending. The problem is that we have yet to develop tools that offer a silver bullet solution.

In the long run, I am firmly committed to the idea that we need to do a better job measuring costs and measuring quality before we can begin to have effective cost control policies. That is because until we can differentiate between productive and unproductive care, while most cost control measures will be able to reduce overall spending, they will not be able to do so without harming the quality of our care or limiting our access to the type of services we now expect.

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Columnist Zack Cooper is a health economist working at the Centre for Economic Performance at the London School of Economics. His column for the Health Policy Forum considers health policy and politics, often from the international perspective. Columnists are regular contributors to the Health Policy Forum who pose their own opinions and policy positions in the realm of health care and health policy. As a leading nonprofit health care research and consulting institute dedicated to improving human health, Altarum encourages open discussion and debate about the many challenges in health care today. All postings to the Health Policy Forum (whether from employees or those outside the Institute) represent the views of the individual authors and/or organizations and do not necessarily represent the position, interests, strategy, or opinions of Altarum Institute. Altarum is a nonprofit, nonpartisan organization. No posting should be considered an endorsement by Altarum of individual candidates, political parties, opinions, or policy positions. Read more.