Drugs - Not The Cost Problem…
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Whenever most people talk about the rising cost of health care, they talk about how expensive prescription drugs are, and how they’re driving up the cost of health care. That’s only partly true. While drugs are not inexpensive - they still make up about 15 percent of HPHC’s health care spending - they are not increasing in cost as fast as other areas of health care delivery. In fact, for the past three years, total drug spending at HPHC has increased by less than 5 percent per year. Medical expenses overall have increased by 10 percent per year, but drugs have only increased by 5. What happened? Well, the biggest thing that happened was tiered formularies - in which people paid less for generics and cheaper brand drugs out of their own pocket, and more for higher priced, but clinically equivalent, brand name drugs. Over time, the number of generic prescriptions went up - from about 44 percent of all prescriptions four or five years ago to more like 60 percent today, and the number of so-called “third tier” prescriptions went from 15 percent of all prescriptions to 1-2 percent today. More spending on generics and cheaper brand name drugs has meant less spending on more expensive - but virtually identical - third tier/brand name medications. And that’s translated into a drug cost trend that’s about half the rate of health care inflation overall.
So what’s driving up the overall cost of health care? Three things, in this order…
1) Outpatient Costs - They make up about 30 percent of health care costs and are rising at 12-14 percent per year. They’re driven by a bunch of things - high end radiology, lab services, outpatient surgeries, and the like. And most of this trend is unit cost driven - not utilization. In other words, procedures that cost HPHC “X” last year cost 1.1 X this year.
2) Inpatient Costs - They make up about 25 percent of health care costs and are rising at 12 percent per year. They’re driven not so much by more volume, but by higher unit prices. A bed day that cost $2,000 last year now costs $2,200 this year.
3) Physician Costs - This makes up about 25 percent of HPHC’s health care costs, and it’s rising at about 12 percent per year. Some of this is volume (more visits than the year before), but much of it is being driven by increases in unit costs - or what we pay for each visit to a clinician.
We can debate all day the relative value of the increases in unit prices being paid by plans like ours to care providers for services rendered — and whether or not these kinds of increases make sense in a 2-3 percent inflation economy. But the rising cost of health care can’t be blamed solely on the pharmaceutical industry — there is plenty of blame to go around.
Very useful observations. Unfortunately, from where I see it the public debate on healthcare costs is likely to continue to focus on drug pricing because that’s where the votes are. Prescription drug costs hit consumers directly, whether via co-pays or lack of coverage, whereas outpatient services and inpatient days are generally absorbed, whether by Medicaid, Medicare, private payers or the hospital’s bad debt office. Since most spending takes place beyond the deductible, there’s less political will to address them - whereas cheaper statins may have a direct impact on consumers wallets.
I think the statistics you cite bear this out. But I’m skeptical of similiar incentives on the outpatient, inpatient and physician costs side. The numbers are already too big for approaches based on controlling costs for the individual consumer.
Charlie,
On your reader poll, why on earth would anyone ask what a given procedure costs unless he or she pays for it directly? But that does not happen: Instead, we have a system of private insurers like yours, and Medicare, and Medicaid that cover most people — and most probably almost everyone reading this blog. So, the answers given are not surprising.
Your competitor, Tufts Health Plan, started a system to rank hospitals by “cost”, but it wasn’t really cost: It was based on the rates paid by that insurer to particular providers — and even then, the actual figures were not provided to the public, just different “tiers”. By the measure of reimbursement rates, you would have different “costs” from Tufts for the same hospitals; and Blue Cross would have still different ones; and the government would have still different ones.
I sure would like to see the different rates that all providers get paid by all the state’s insurers. But that won’t happen and cannot under current law. We know, though, that the rates certainly are not based on the safety, quality, and results of service offered. Perhaps you can explain more how they are derived. I know you can’t disclose particular numbers, but maybe you can elaborate on the factors used by insurers in deciding these matters. After all, in the absence of public debate and disclosure, we all put our faith in you and the other insurers to decide on the appropriate pricing of health care.
The question, then, is what can HPHC and other payors do to moderate the medical inflation rate that gets passed on to the ultimate payors (i.e., payors of premiums)? Introducing tiered pharmacy benefits gives you something to show off in year one, but what about year two and therafter? It doesn’t moderate the rate of increase.
Many of the most-talked-about initiatives in healthcare are similar short-term fixes: pay-for-performance, gainsharing, etc. The $64,000 question (or, should I say, the $2.2 trillion question) is: What’s the plan for next year? Or, better yet: What’s the new paradigm that can move us away from incremental shifts?
Personally, despite all the talk about a groundswell of support for wide-ranging health care reform, I don’t think true from-the-ground-up reform is in the cards. Much as I hate the idea, I think we’re stuck with incrementalism. If you believe otherwise, I’d be interested to hear about it.
– David Harlow
Will says he thinks it’s unlikely that tiering - where people pay more out of pocket for more expensive drugs - which has worked well to tame, or at least slow down, the rate of incease in pharmacy spending, won’t work for hospital and physician costs. BIDMC President Paul Levy implies the same thing in his response, and they’re both probably right. Nonetheless, we’re about to begin a bit of an experiment on this question with the implementation of the Commonwealth Choice plans that will be made available to individuals through the Massachusetts Connector Authority. I have as many beefs with the health care reform process as the next person, but I’m very curious to see how individuals, left to their own devices, make choices under this model.
Traditionally, employers choose the health plans and the plan designs that are made available to their employees, and by doing so, they also choose the provider network. Generally speaking, employers prefer that every provider be “in” the health plan’s network. That way, the employer doesn’t have to worry about forcing any of their employees to change physicians or hospitals to receive services on an “in network” basis, and if most providers and provider organizations are “in network” in a state or region, that also limits the number of complaints and concerns that are brought to management by employees and their families.
As a result, a “quality” provider network has translated over time into an “all in” network. In other words, good health plans have great provider networks if they have virtually every major provider or provider organization in their network. Broad choice defines “quality.”
But the fact that individuals - not employers - will choose the plan design, and with it, the provider network, that’s best for them and their family as part of the Connector’s Commonwealth Choice offerings puts this “all in” question to the test. Will individuals choose less benefits, higher premiums, or more limited provider networks when the choice is theirs, and not their employer’s? No one knows the answer to this question, and it will be tested, for the first time in a long time, as part of health care reform. Starting in July, individuals buying coverage through the Connector can choose plan designs that are priced more or less the same, but some have limited networks and fewer out of pocket expenses, while others have broader networks, and more out of pocket expenses.
Needless to say, this is why the transparency discussion is so important. Most people who choose a network that doesn’t include some providers would like to be assured that they can access information that helps them decide what the trade-off really means to them. And while the plans have done some good work bringing information about provider performance forward for their members to review, that process is still “in development.”
Paul raised another issue in his comments - having to do with the process through which health plans negotiate payment rates with hospitals and physician groups. In simplest terms, what we - and other carriers - pay providers is usually some multiple of the Medicare fee schedule. Medicare, as most people know, pays for care to the over 65 population in this country, and is easily the largest purchaser of health care services in the country (and maybe the world). We may not have universal coverage in this country (which is a disgrace), but Medicare is most definitely the payment benchmark everyone uses to “keep score” on how much they’re either paying or being paid. In a perfect world, I suppose, we’d all pay something like Medicare for everything (presuming, of course, that what Medicare pays makes sense - but that’s a blog for another day). In reality, we pay different percents of Medicare to different provider organizations - based on their size, their relative importance, their brand and their market position. Notice that I didn’t say we pay more for better/higher quality, because we really don’t. We offer some bonus money and some supplemental funding for quality initiatives, but this is a relatively small piece of the total puzzle - certainly not enough to say we’re paying purely for quality.
In many cases, we try to make sure our payments cover the costs of caring for our members, and often end up having to include Medicare and/or Medicaid and/or free care shortfalls as well - and then have to factor in market dynamics (just how important is this hospital or provider group to the plan’s ability to sell its products?) - to come up with a rate of payment. This creates a lot of variability.
For example, if Harvard Pilgrim was paying providers purely on complexity and efficiency differences, then there wouldn’t be that much difference in what we paid hospitals across Massachusetts on a case-mix adjusted basis for each admission. In other words, we’d pay more for more complex cases, and the case mix adjustment would level that off, and if there were efficiency differences, that should be evened out on a cost per admission basis by our payment policies.
Well, it doesn’t work out that way. The cost per case mix adjusted admission across the ten hospitals in Massachusetts that Harvard Pilgrim does the most business with varies by over 70%, and the cost across all MA hospitals varies by well over 100%, even after adjusting for the complexity of the cases.
Our payment policies reflect this differential. We can pay anywhere from 100 percent of what Medicare pays to 150 to 175 percent of what Medicare pays, depending on the provider and the circumstances. In some cases, providers argue that Medicare doesn’t cover their costs, and the private plans need to pay more to make up the deficit in their Medicare business. The same is often said about Medicaid (which covers about 10 percent of the population in MA, NH and ME).
And while Paul’s right - that simply putting this information to the public domain for all to see is complicated by confidentiality and privacy concerns, I do believe the Massachusetts Health Care Quality and Cost Council has the authority to collect and disseminate information that can help us all better understand the cost and price variability that already exists, and that other states, including New Hampshire and Maine, are leading the way on this.
How much of our healthcare costs are derived from the cost of labor underlying services performed?
As our population ages, demand for healthcare will rise, but will the supply of healthcare workers rise accordingly to meet demand?
Is a shortage of healtcare professionals responsible, now or in the future, for the rising cost of healthcare?
Terry - very good question. I would guess that somewhere between 50-60 percent of health care costs are labor costs. But I’m also presuming that as day surgeries, new drugs, and less invasive technologies have made treatment a bit less intrusive than it used to be, that we spend a greater share on drugs, devices and supplies than we used to. In other words, labor’s still a big share of the total, but it’s probably a smaller share than it used to be.
As we age, we’ll use more health care, and most analysts believe that this increase in demand will create personnel shortages in the nursing and trained technician fields. That’s likely to be exacerbated by the difficulty of managing any 24/7 operation - like a hospital or a nursing home - in an economy that offers lots of other choices to people who might want to work a less demanding day. In fact, I think most hospital leaders would say that shortages and shift issues in 24/7 institutions have already created pressure on labor costs for key trained positions, and that that trend is likely to continue going forward.
Perfect work. Great site. Add more pictures. It’ll make your site more attractive.
Charlie:
I am a broker in Worcester, love the blog. Very interesting to see the break -out and it shows that the tiering of prescriptions has at least slowed the growth in comparison to other expenses.
The problem as I see it is that if every doctor and every hospital is in every network, how exactly are we creating competition. If hospital and doctor costs are going up to fast, then an HMO has to make a decision whether or not they want to keep them in their network.
At first this will cause problems if you were to drop a hospital or doctor group, but if it helps lower the costs to provide health insurance groups and brokers will understand.
Bill Randell
Could you comment on the recent announcement by Wellpoint (http://phx.corporate-ir.net/phoenix.zhtml?c=130104&p=irol-newsArticle_general&t=Regular&id=981192&) that a portion of their employees’ incentive income will now be tied to improvements in the “member health index” score which measures the quality of care the members receive. Do you think this will be effective in improving care?
Two elements that, surprisingly, haven’t been emphasized in this cost discussion are prevention and patient education (not about insurance, but about health maintenance). Of course there would be value in focusing on these areas, but do you think there would also be bottom line cost benefits?
I am enjoying this discussion immensely.
I think on the issue of prevention and patient education, Harvard Pilgrim does a lot of these different things to help to control costs.
I don’t know the exact cost cuts of those kinds of initiatives, but it is an intregal part of how the Care Management department at the company operates.
I agree that helping to educate a consumer about things such as when they should be getting preventative screenings, as well as sending reminders about them are very important. If we can help to have a healthier consumer, in the end it can only assist in making health better, and thus helps pass on the cost savings.
Bill Randell hits on a very interesting phenomenon in health care cost and contracting. The short hand version of his question might be more like, “So - if you the health plan need to say ‘yes’ to every hospital and provider group you engage in contract discussions with - how are you supposed to hold down health care costs?” I ask myself this question all the time, and it’s a hard one to answer.
Generally speaking, employers - and brokers - want health plans to provide their clients and employees with access to a full suite of participating physicians and hospitals, which makes it remarkably difficult for any health plan in this region to simply say “no” if the plan believes the payment rates being demanded by the provider are too high. This question was tested pretty thoroughly in 2000, when Tufts Health Plan and Partners HealthCare went toe to toe over what Tufts was willing to pay Partners. In the end, the employer community told Tufts that even though only ten percent of Tufts’ members used Partners’ hospitals and physicians, 100% of Tufts’ employer accounts and their employees wanted in network access available to those facilities, and they better sign a contract with them. It was a watershed moment, and the message has remained pretty constant ever since. The plans in MA have responded, and generally speaking, the statewide carriers - HPHC, Tufts and BC/BS of MA - have all major providers in their networks.
There are some exceptions. Harvard Pilgrim sells a product called “Granite State” in NH that features NH hospitals and Massachusetts community hospitals, and requires a higher member co-pay to go to a teaching hospital in Massachusetts. Partners HealthCare decided not to participate in this product and the plan is about 5-8 percent cheaper than our other all access offerings in New Hampshire. Despite the higher co-pay to go to AMC’s, and the total absence of Partners, a lot of folks in NH have signed up for the plan over the past few years, with no issues or problems around care and care delivery.
As the MA Connector rolls out individual plans for people this summer that have limited provicer networks, it will be interesting to see if people sign up for coverage that has lower out of pocket costs, lower premiums, but limited provider networks - of if they choose the broad network, and the higher premium and higher out of pocket costs that come with it. Stay tuned!
Glan asks about Wellpoint’s plan to compensate staff on the health of their members. Since I don’t know the details of the program - and the press release gave precious few of those - it’s hard to tell what’s really on the line here - but I think the notion of saying to health plan executives and staff that the health of our members is our business is a good one, and putting money on the table to incent people to pay attention to it is a good move. Again, it’s hard to draw too many conclusions from this, but it’s an interesting step in an unusual direction. I would add that my compensation - along with the compensation of most senior managers at HPHC - is affected by the plan’s performance each year on HEDIS - which is a national dataset concerning the quality of the care provided to HPHC memberes - and on CAHPS - which measures member satisfaction with HPHC. If we don’t finish in the 90th percentile on both of these measures during the year, then I - and others - get dinged on my - and our - pay.
Barbara asks a good question about the consumer/patient. What’s in it for them, and whatever happened to prevention and education? My next post will be about this - and will, hopefully - address some of Barbara’s questions.
Perhaps the solution to the rising costs in health care is to take less medication for illness. Today doctors will prescribe medications to customers for even the common cold that will go away in a day or two. The less medications a person is taking the less money will be spent. Prescription drugs have such a wide range of side effects that other prescription drugs are needed to counter act the side effects.