THE COMMONWEALTH

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Promoting Cost-Effective Care: Consumer Incentives versus

“Supply Side Strategy”Karen Davis

President, The Commonwealth FundHealth System Change Conference

December 3, 2003

THE COMMONWEALTH

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2Employer Health Benefit DesignFrom an Economic Perspective

• If employers shift health insurance costs backward onto employees, rising costs don’t affect employers– Employers should be largely indifferent to extent of employee cost-sharing for benefits

or employee share of premium– Employers should simply act as employees’ agent in obtaining the mix of health

benefits and wages desired by employees– Employee can receive more in wages and less in health benefits or more in health

benefits and less in wages• In such a world, total labor compensation is largely affected by productivity growth, e.g. if

total compensation goes up 3% and health benefits are 15% of total compensation, and projected to rise by 12% in coming year, employer could offer:

• 12% increase in health cost, 1.4% increase in wages• 10% increase in health cost, 1.8% increase in wages, or• 0% increase in health costs, 3.5% increase in wages

– Employer should simply ascertain which is most preferred by employees• In real world, unlikely that backward shifting occurs perfectly or quickly

– Employers want to obtain value for health benefit dollars– Society wants resources used efficiently– Equitable access to care for low-wage workers and equitable distribution of financial

burden are important– Quality of care is important – e.g. no underuse or overuse or misuse

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Cost-Sharing from Consumer Perspective

• Cost-sharing in the U.S. is already high

• Cost-sharing creates a burden on low-income and sick

• Health care costs concentrated in sick few

• Cost-sharing leads to underuse of appropriate care

• Consumers rarely have the information to make choices based on quality and efficiency

• Promoting cost-effective care directly by working on the supply side is a better strategy, e.g.

– Research on cost-effective care

– Clinical guidelines, quality standards

– Public data on quality and efficiency

– Financial rewards to providers for high quality, efficient care

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HSC Issue Brief on Cost-Sharing• Important contribution

• Shows higher cost-sharing falls disproportionately on low-income and sick

• Most important finding is percent of population who are underinsured (i.e., at risk of spending more than 10% of income on health care if become seriously ill) under various cost-sharing scenarios

• If focus on hospitalized patients – which could happen to anyone – 2-7% underinsured under modest copayments, 20% under cost-sharing in typical employer plans currently, 32% in a $1000 deductible plan similar to Health Savings Account legislation, and 66% under a $2500 deductible plan

• Trend toward higher cost-sharing will increase numbers of underinsured

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5

405 399335 328

290249 240

171

707

0

100

200

300

400

500

600

700

800

U nited

S tates

Canada Australia OE CD

Median

J apan Germany New

Zealand

Franc e U nited

K ingdom

U.S. Patient Cost-Sharing is Highest

c

ba a

a 1999, b 1998, c 1996Source: Anderson et al., Multinational Comparisons of Health Systems Data, 2002.The Commonwealth Fund, October 2002.

Dollars

Per Capita Out-of-Pocket Health Care Spending in Selected Countries, 2000

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Cost-Sharing Blunt Instrument for Affecting Use of Appropriate Care

• McGlynn NJEM June 2003 study finds that only 55% get indicated care– About 100 million Americans underuse care– About 30 million Americans overuse care

• Increased cost-sharing will reduce overuse but will also increase the extent of underuse

• Rand Health Insurance Experiment demonstrated this• More recent study in Canada with increased cost-sharing

demonstrates that• NEJM December 4, 2003 study indicated prescription drug cost-

sharing leads not to filling needed prescriptions• Most costs are concentrated in very sick few who have little control

over decision-making for their own care, e.g. heart attack, stroke, trauma patients

• High deductible plans not the way to control cost of high-cost cases

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Cost Sharing Reduces Likelihood of Receiving Effective Medical Care

56

85

5971

0

20

40

60

80

100

Low -Inc ome H igher-Inc ome

Children Adults

Source: K.N. Lohr et al., Use of Medical Care in the RAND HIE. Medical Care 24, supplement 9 (1986): S1-87.

Percent*

In Cost-Sharing Plans

* Probability of receiving highly effective care for acute conditions that is appropriate and necessary compared to those with no cost-sharing

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Cost Sharing Reduces Both Appropriate and Inappropriate Hospital Admissions

22

27

0

5

10

15

20

25

30

Appropriate Admiss ions* Inappropriate Admiss ions*

Percent reduction in number of hospital admissions per 1000 person-years

Source: A.L. Siu et al., “Inappropriate Use of Hospitals in a Randomized Trial of Health Insurance Plans,” New England Journal of Medicine 315, no. 20 (1986): 1259–1266.

*Based on Appropriateness Evaluation Protocol (AEP) instrument developed by Boston University researchers in consultation with Massachusetts physicians

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Cost Sharing Reduces Use of Both Essential and Less Essential Drugs and Increases Risk

of Adverse Events

9

1514

22

0

5

10

15

20

25

Essential Less Essential

E lderly Low Inc ome

Source: R. Tamblyn et al., “Adverse Events Associated With Prescription Drug Cost-Sharing Among Poor and Elderly Person,” JAMA 285, no. 4 (2001): 421–429.

Percent reduction in drugs per day

117

43

9778

0

20

40

60

80

100

120

140

Adverse Events ED V is its

E lderly Low Inc ome

Percent increase in incidence per 10,000

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Health Care Costs Concentrated in Sick Few

0%

10%

20%30%

40%

50%

60%

70%80%

90%

100%

U.S. Population Health Expenditures

1%5%

10%

55%

69%

27%

Source: A.C. Monheit, “Persistence in Health Expenditures in the Short Run: Prevalence and Consequences,” Medical Care 41, supplement 7 (2003): III53–III64.

Distribution of Health Expenditures for the U.S. Population, By Magnitude of Expenditure, 1997

50%

97%

$27,914

$7,995

$4,115

$351

Expenditure Threshold (1997

Dollars)

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Hard to Design Cost-Sharing to Avoid its Pitfalls

• Would have to vary by income and health status• Would have to vary by clinical indications for a given service,

e.g. an MRI is appropriate for some conditions but not others• Patients would have to have access to information on quality

that they do not now have• Even primary care physicians rarely have access to quality

information on the specialists to whom they refer patients• Physicians are resistant to having quality data available• Would have to change patient-physician relationship with

more control over decision-making by patients• Plans could create networks of high quality, efficient

providers– Although their access to quality data and risk-adjusted

longitudinal cost data are also limited

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There is a Better Way:Walking on the Supply Side

• A “supply side” strategy to promoting cost effective care shows more promise than increased patient cost-sharing

• Instead of cost-sharing for ER use, nurse call banks are used by Partners Health Care to call patients with frequent use of ERs, screen for depression, medication compliance

• Instead of cost-sharing for tests, Intermountain HealthCare puts clinical criteria for ordering tests before the ordering physicians

• Instead of tiered cost-sharing for hospital care, University of Pennsylvania Hospital uses advanced practice nurses to work with high-risk hospitalized patients and reduce rehospitalization

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8,809

4,977

1,1758090

2,000

4,000

6,000

8,000

10,000

12,000

Control Intervention

V is its Inpatient Care

Effect of Advanced Practice Nurse Care on Congestive Heart Failure Patients’ Average

Per Capita Expenditures

Source: M.D. Naylor, “Making the Business Case for the APN Care Model,” report to the Commonwealth Fund, October 2003; estimated charges by Mark Pauly.

Dollars

9,618

6,152

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Achieving a High Performance Health System: What it Requires

• Expansion of government’s role:– In setting quality standards/clinical guidelines on effective

care– Supporting research on cost-effective care and cost-

effectiveness of quality improvement interventions– Requiring public release of quality and efficiency data – Paying for performance within public programs (especially

Medicare and Medicaid)• Public-private partnership:

– Engage entire health care system in continuous quality improvement

– Develop and disseminate quality improvement tools– Identify and spread best practices – Encourage learning collaboratives to improve care– Promote modern information technology– Reward quality and efficiency

• Automatic and affordable health insurance for all

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AcknowledgementsStephen C. Schoenbaum, Senior Vice President,

Commonwealth Fund; Stephen C. Schoenbaum, Anne-Marie J. Audet, and Karen Davis, “Obtaining Greater Value From Health Care: The Roles of the U.S. Government,” Health Affairs, Nov/Dec 2003.

Barbara Cooper, Senior Program Officer, Commonwealth Fund; Karen Davis and Barbara Cooper, American Health Care: Why So Costly, Commonwealth Fund, June 2003 Senate Testimony.

Research assistance – Alice Ho, Research Associate, Commonwealth Fund

Karen Davis, Achieving a High Performance Health System, Commonwealth Fund, forthcoming publication January 2004.

Visit the Fund at: www.cmwf.org