System Wide Strategies:

Controlling Costs

Health Care Coverage in Hawaii

Turning Point or Tipping PointOctober 17, 2005

Enrique Martinez-VidalDeputy Director

RWJF’s State Coverage Initiatives program

National Health Spendingin Billions

$27 $73$246

$696

$990

$1,310$1,426

$1,559$1,679

$1,805$1,937

$0

$400

$800

$1,200

$1,600

$2,000

$2,400

bil

lio

ns

pe

r y

ea

r

Note: Selected rather than continuous years of data are shown prior to 2000. Years 2004 forward are CMS projections.

Source: Centers for Medicaid and Medicare Services (CMS), Office of the Actuary.

7.0

12.013.3 13.3 13.2 13.3

14.1 14.9 15.3 15.4 15.6

18.7

8.8

0.02.04.06.08.0

10.012.014.016.018.020.0

% o

f G

DP

Note: Selected rather than continuous years of data are shown. Years 2004 forward are CMS projections.

Source: Centers for Medicaid and Medicare Services (CMS), Office of the Actuary.

National Health Spending as a

Share of Gross Domestic Product

Average Annual Growth Rate

in National Health Expenditures

Source: Centers for Medicare and Medicaid Services, Office of the Actuary.

10.6%

12.9%

11.0%

8.5%

5.6%5.1%

5.7%

7.2%

8.9% 9.3%

7.7%

0%

2%

4%

6%

8%

10%

12%

14%

1970 1980 1990 1993 1995 1997 1999 2000 2001 2002 2003

An

nu

al in

cre

ase

ove

r p

rio

r p

eri

od

Note: Selected rather than continuous years. Source: Centers for Medicare and Medicaid (CMS), Office of the Actuary.

Source: Centers for Medicare & Medicaid Services, Office of the Actuary.

Note: Other = Durable Medical Equipment, Other Non-durable Medical Products, Public Health Activity, Research, Construction.

Spending Distributionby Category, 2003

(Total Spending = $1.7 Trillion)

Hospital Care, 30.7%

Prescription Drugs, 10.7%

Dental/Other Professional,

10.3%

Other, 10.2%

Nursing Home/Home Health Care,

9.0%

Administration 7.1%

Physician and Clinical

Services, 22.0%

Share of Health Care Spending vs.

Share of the Increase, 2003

12%

6%

8%

8%

14%

24%

26%

7.1%

9.0%

10.2%

10.3%

10.7%

22.0%

30.7%

0% 5% 10% 15% 20% 25% 30% 35%

Administration

Nursing Home/Home Health Care

Other

Dental/Other Professional

Prescription Drugs

Physician and Clinical Services

Hospital Care

Contribution to the Increase Share of Spending

Note: Health spending categories total to National Health Expenditures.

Source: Centers for Medicare and Medicaid Services (CMS).

Annual Growth in Private Health Insurance Premiums as Reported by Employers

18.0%

14.0%

8.5%

0.8%

5.3%

8.2%

10.9%

12.9%13.9%

11.2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

1989 1990 1993 1996 1999 2000 2001 2002 2003 2004

US

KFF/HRET Survey of Employer-Sponsored Health Benefits: 2004.

Data on premium increases reflect the cost of employer-based health insurance coverage for a family of four. Percent increase represents the growth over the immediate prior year.

Total Health Care Spending as a Share of GDP

Year Percent of GDP if health care

spending grows 2.5 percentage

points faster than GDP

Percent of GDP if health care

spending grows 1.0 percentage

points faster than GDP

2005 15.6 15.6

2020 21.6 19.8

2030 27.6 21.9

2040 35.2 24.1

Source: Henry J. Aaron, Brookings Institution, “It’s Health Care, Stupid! Why Control of Health Care Spending is Vital for Long-

Term Fiscal Stability,” Paper presented to the Conference of the Federal Reserve Bank of Boston, June 15, 2005.

Medicare and Medicaid Spending

as a Share of GDP(includes State share of Medicaid spending)Year Percent of GDP if

health care spending grows 2.5 percentage

points faster than GDP

Percent of GDP if health care

spending grows 1.0 percentage

points faster than GDP

2005 4.2 4.2

2020 7.8 6.5

2030 11.5 8.4

2040 16.1 10.1Source: Henry J. Aaron, Brookings Institution, “It’s Health Care, Stupid! Why Control of Health Care Spending is Vital for Long-

Term Fiscal Stability,” Paper presented to the Conference of the Federal Reserve Bank of Boston, June 15, 2005.

Percent of Median Family Income Required to Buy Family

Health Insurance

8

17

0

2

4

6

8

10

12

14

16

18

1987 2003

Source: Calculations by Len Nichols, using KFF and AHRQ premium data, CPS income data.

Labor Market Realities Occupation Family premium/Median wage

Physician 7.3%

History professor 15.8%

Secretary 29.1%

Carpenter 24.2%

Cook 49.8%

Source: KFF premium and BLS wage data.

Distribution of Health Spending, Adults Ages 18-64, 2001

Source: Employee Benefit Research Institute estimates from the 2001 Medical Expenditure Panel Survey.

Long-term Drivers (1)

Transition to Looser Managed Care

Provider Consolidation and Pushback

Provider Capacity Constraints Patient Reporting More delays, unmet need Physicians working longer hours ER Overflow, patient diversion Shortages of nurses and staffed hospital beds

Long-term Drivers (2) Financing System

Third-party payers with no predetermined/defined limits Relatively low patient out-of-pocket costs Payment system pays more to providers to deliver more

services Limited information about the effectiveness of

tests/procedures/drugs/etc.

Advances in medical technology Provide better outcomes Same outcomes but less pain or shorter recovery Lower unit costs (but higher utilization)

Increased resources in medical care More physician specialists More facilities

Long-term Drivers (3) Rising Prevalence of Treated Disease

Lifestyle changes Obesity (linked to rising rates of diabetes, hyperlipidemia [i.e.,

high cholesterol], hypertension, heart disease)

Direct-to-Consumer Marketing Associated with Strong Sales of Key Drugs (Lipitor, Nexium,

Zocor, Norvasc, Prevacid)

“Oversold” drivers Population aging (debatable) Professional liability/medical malpractice Mandated benefits

Types of Possible Remedies (1)

Purchasing to Improve Quality/Patient Safety Pay for performance Tiered networks The Leapfrog Group

Purchasing Strategies to Reduce Costs Pooled purchasing, rebates, etc

Wellness Programs Disease Management Information Technology Evidence-Based Medicine Improve Efficiency (i.e., appropriate care

settings)

Types of Possible Remedies (2)

Consumer-Related Strategies Changes to Consumer Cost Sharing Consumer Education (Performance Guides, Cost

Transparency) Consumer-Directed Health Care

Supply Controls Ration Services, CON, professional supply, technology

diffusion Price Controls

Hospital Rate Regulation Public Program Payment Formulae Use Monopsony Power of State

Current Employer Strategies for Offering

Insurance Compete for labor, most of whom expect ESI

Impose more employee cost-sharing Higher percentage of premium Less generous coverage

• More cost-sharing at point of service (higher co-insurance or copays)

• Reduced benefits• Limit choice of providers

Consumer-Directed Health Care

Demand more quality/accountability initiatives Information (quality/cost) Disease / care management

Long-Term Options for Coverage

Promote evidence-based medicine

Promote private coverage expansions

Be prepared to increase public financing for those unable to pay

Long-Term Options to Control Costs

Develop Approaches to Drive Administrative & Clinical Waste from System—new roles for patients, providers and health plans

Create Incentives for Physicians, Bio-Tech/Pharma/Device Industry to Develop High Benefit-Lower Cost Approaches

Focus on Care Management for Chronically Ill Patients

Will Require Substantial New Investment in: Evidence-Based Data, Incentives to Use It Restructuring How We Deliver Care (IOM Style Models) New payment incentives that pay for quality and

performance. Medicare could pay a key role here.

Conclusion Recent decline in cost trends

appears to be leveling Today’s cost trends continue to

make insurance less affordable and strain public finances

Current efforts to contain costs emphasize additional patient cost sharing and hopes for increased efficiency