US Healthcare: Strategies for Containing Costs

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In 2019, the most recent year with full 12-month statistics, the U.S. healthcare sector accounted for 17.7% of national GDP.  With the American public, industry, and government burdened by mounting healthcare expenses, policymakers are examining myriad proposals to save on healthcare costs. These recommendations range from targeted and incremental measures to major restructuring to a single-payer system for the entire population, generally envisioned as “Medicare-for-all.”

Key Takeaways

  • U.S. healthcare costs are increasing faster than the GDP—they will be almost 20% of GCP by 2028.
  • Cost-cutting ideas range from price transparency to a single-payer, Medicare-for-all plan.
  • Private insurers switching to Medicare fee schedule would save $350 billion in 2021.
  • Medicare-for-all would cost less than current systemwide healthcare expenditures.  
  • Health-sector consolidation is prompting calls for stronger antitrust enforcement and stricter patent laws.

The Politics of Healthcare

Since the enactment of the Affordable Care Act (ACA) and the implementation of its subsidized insurance market, the need for government action has become more accepted, or at least discussed.  However, the California v. Texas litigation, contesting the ACA’s constitutionality, is pending ominously before the U.S. Supreme Court.

The conflicting interest groups that would be affected by changes to the healthcare system possess great economic and political power. They range from independent private practitioners to pharmaceutical giants and integrated insurance and provider conglomerates to the hospital systems that occupy important positions of influence in every Congressional district. Thus, even minor reforms confront substantial resistance.

President Biden‘s campaign platform set out an ambitious healthcare agenda, including adding a ‘public option,’ a government-run, public health insurance plan, to the ACA offerings. The platform aimed to tackle market concentration and cut drug prices by allowing Medicare to negotiate prices. It supported imposing controls on new drugs with no competitors and on abusive pricing of other drugs. It proposed allowing Americans to buy prescription drugs from other countries, as well as increasing access and affordability through  premium tax credits and other benefits. The Biden program intended to reduce maternal mortality, end restrictions on women’s reproductive care, advance mental-health parity, and increase support for community health centers.

However, President Biden, with slim Democratic majorities in both Houses of Congress, has not presented his entire campaign healthcare program in his initial legislative proposals, despite pressure from the more liberal members of his party. Although he has proposed tax-based assistance for insurance premiums and home care—as well as more support for Veterans Administration hospitals—President Biden has not included his campaign’s major healthcare initiatives in his formal infrastructure and family assistance plans.

Meanwhile, proponents of the ACA urge enhancing its insurance markets and coverages, and expanding Medicaid, particularly to states that have not elected the ACA’s Medicaid incentives. Many business leaders—who have tried to reduce costs by adopting value-based payments, increasing employee cost-sharing, offering wellness incentives, and other measures—are finding their efforts at most marginally effective. And a surprising number who would
ordinarily reject any government intervention appear ready to support government action to reduce spending.

Medicare Expansion

Recognizing that Medicare operates at less cost than private insurance, healthcare economists have studied the adoption of its payment structure and evaluated its potential for transformation into a broader system as methods for reducing national healthcare spending. The lower rates paid by Medicare, if extended to more providers, would produce savings. If Medicare rates were used for private insurance reimbursement, the reduction in spending has been estimated at $350 billion in 2021 alone. More and more frequently, this major restructuring is proposed as a single-payer system. 

Single-payer program

Conversion of the Medicare program to a single-payer program, “Medicare-for-all,” has support from major political figures, but the complexity of switching from the current system and the political impediments it would need to overcome make its adoption unlikely. If a single-payer system provided the present Medicare benefits and cost-sharing structure, it likely would result in significantly lower spending than present levels because Medicare pays for services at lower rates than private insurance and has lower administrative costs.

Different designs for a single-payer, generally variations on a Medicare-for-all system, produce higher or lower savings depending on their features.  If CMS were given authority to negotiate drug prices with pharmaceutical companies, a power that Medicare currently lacks, additional savings would be expected. However, it should be noted that many single-payer proposals would provide more generous benefits than the current Medicare program. By providing richer benefits, such as dental, vision, hearing and long-term care—and by lowering or eliminating cost-sharing by beneficiaries—these more comprehensive proposals would save less. And, if especially generous, these alternatives could cost more than would a system more closely modeled on the current Medicare program.     

Alternative models: CBO, Urban Institute. and RAND studies

The Congressional Budget Office (CBO) has compared the economics of a comprehensive, single-payer system to the status quo. The CBO found that a comprehensive Medicare-for-all program could reduce overall health spending while providing universal coverage, bolstering revenues for clinical services, and eliminating most copayments and deductibles. CBO experts evaluated five alternative structures using different assumptions about provider payments; enrollees’ copays; demand for services; coverage of long-term care, vision, dental, and hearing services; and the impact of a single-payer, governmental plan on Medicaid and other government programs. 

CBO estimated that spending would fall even as healthcare utilization rises because the single-payer system would involve simpler, less costly administration than the present system with multiple private insurers and a wide variety of plans. The CBO analysis emphasized that the present Medicare system spends only 2% of its revenues on administration while private insurers spend approximately 12% on administrative overhead.

The Urban Institute and RAND also have published studies about the cost and coverage effect of changes to the present system. The Urban Institute evaluated four plans to add, incrementally, to the changes made by the ACA and also considered two single-payer alternatives, one a “lite” version and the other a more comprehensive plan closer to system studied by the CBO. RAND evaluated a comprehensive, single-payer system proposed by state legislators for New York State.

Differences in the assumptions and methodologies used by the three organizations hinder a direct comparison of their “comprehensive” studies with each other and with current national expenditures. The comprehensive plans evaluated by the Urban Institute and RAND covered more services than are provided under Medicare currently. Their plans also were more generous than all but the most expensive of the five alternatives considered by the CBO.

The Urban Institute and RAND concluded that the cost for their richer models would exceed total national, current spending. However, the extent to which any excess may be attributable to their broader range of services is unclear. In addition, CBO has noted that the three studies used critically different assumptions about administrative costs. While CBO generally assumed administrative costs would be consistent with Medicare’s current low rate of administrative expenses, the Urban Institute and RAND analyses used higher rates, closer to those reported at present for private sector plans. 

Lower age for Medicare eligibility

In the American Families Plan, President Biden has proposed several changes to Medicare, including giving individuals the option to enroll in Medicare at age 60.   Many Democrats support this proposal.  It would shift costs from private insurance to the Medicare program. Because Medicare rates are lower than private insurance rates, transferring people to the Medicare system likely would produce a net reduction in overall healthcare spending.   

Potential Targeted Savings Measures

Besides major restructuring of the healthcare system, researchers are also investigating targeted savings measures that will reshape some elements of the system with the aim of reducing costs. Here are five broad areas they have looked into and worked on.

Prescription drugs

Americans pay far more for prescription drugs than those same drugs cost across the border in Canada and in most other countries. Recognizing the impact of drug pricing on both private- and public-sector costs, policymakers have considered various approaches to reducing Rx costs.

Important

U.S. drug prices far exceed Canadian and other countries’ rates….Critics discount the claim of large pharmaceutical companies that R&D requires high prices….Pharmacy benefit managers’ lack of transparency prompts criticism….Biden campaign supported legalizing foreign drug purchases and Medicare negotiation of drug prices.

Pharmaceutical Company Practices. Recommendations for reducing drug prices include laws and regulations that would directly affect pharmaceutical-company pricing and would authorize Medicare to negotiate to reduce prices for its beneficiaries and potentially lower costs throughout the drug market.  Also, critics of pharma behavior discount industry arguments that drug companies’ investment in R&D necessitates high drug prices. They recommend that legislators and regulators ban questionable market practices, such as anticompetitive ‘pay for delay’ agreements to prevent or delay the introduction of lower-cost generic drugs and biosimilar drugs.

Additional reform proposals include patent-law changes, for example, limiting secondary patents that have no effect on a drug’s safety or clinical efficacy; restricting the granting of multiple, related patents. Also being studied: stricter qualification rules for—and limiting some benefits of—orphan drug status; implementing more efficient approval processes; and adopting pricing regulations that recognize government funding supports the development of some drugs.

The Role of Pharmacy Benefit Managers. Critics of high drug prices also question the conduct of pharmacy benefit managers (PBMs). PBMs serve as intermediaries, negotiating payment rates for prescription drugs on behalf of insurers and their networks, employers, and other plan sponsors. Increasingly, observers question whether PBMs are fulfilling their primary purpose, which was to use the market power of their large clienteles to reduce drug pricing for plan members. Economic and policy analysts have focused on the role played by these intermediaries and are challenging PBMs’ current practices and impact.

PBMs’ operations, the prices they negotiate with drug companies, and their allocation of costs and savings lack transparency. Without transparency it is difficult, often impossible, for plan sponsors to understand how their payments are directed among the PBMs, drug companies, and pharmacies comprising their networks. Some critics further allege that the creation of drug formularies, i.e., the specific drugs and pricing available to plan members, may be affected more by PBMs’ and drug companies’ profit goals than by drug quality and efficacy. The concentration and market power of PBMs—with three companies controlling more the 76% of the market—have raised antitrust questions about both vertical and horizontal integration involving PBMs and other players in the healthcare and insurance sectors. 

Price transparency

Some policy analysts have promoted better consumer education as an approach to reducing U.S. healthcare spending. Transparency has been promoted to encourage consumers to choose less expensive providers. However, because most consumers are covered by private or governmental plans that establish the rates paid to their in-network providers and generally set standard cost-sharing formulae for plan members, consumers’ need for, and use of, specific pricing information is most important for services receiving no or very limited insurance coverage—for example, dental services, hearing aids, eyeglasses, and fees charged by out-of-network providers.  Recent federally mandated hospital price disclosures have had limited utility because of the complexity of thousands of billing codes, technical language, and inconsistent presentation on hospitals’ websites. Thus, transparency assists consumers in purchasing a narrow range of services but seems unlikely to deliver significant, direct cost containment.

What healthcare price transparency can do, however, is help the healthcare sector develop a more rational and equitable economic structure. Transparency has facilitated more and better systemic studies. It provides a substantive information to policymakers and analysts from extensive data collections that help them to understand the present system and to evaluate policy changes. Transparency does raises a potentially problematic question that needs to be considered: Might disclosure of negotiated rates of providers facilitate anticompetitive behavior in some
markets and lead to increased costs as lower-cost providers seek higher fees from insurers? Preventing abusive practices while reaping the benefits of transparency is imperative.

Increased consumer cost-sharing

It was widely thought that increases in consumer cost-sharing—through higher insurance deductibles and co-pays—would discourage unnecessary services, motivate consideration of costs versus benefits, and reduce expenses, particularly for employers. A study of the effect of increased out-of-pocket costs on consumers indicates, however, that consumers generally are unable to evaluate costs against benefits with respect to medical care. More concerning, researchers have found that faced with higher personal expenses, individuals forego treatment indiscriminately, without regard to whether it has a high or low benefit.

Tackling waste and inefficiency

Waste has been estimated to constitute as much as 25% of healthcare spending, ranging from $760 billion to $935 billion. But, identifying waste and addressing it have been elusive. A broad, vague category, waste has been described as including overtreatment, inappropriate pricing, failure in healthcare coordination or delivery, administrative complexity, and fraud and abuse. Focusing more on inefficiency than on ill-defined waste might be a more productive approach to containing costs.

Metrics: volume vs. “value”

Similarly, emphasizing value in healthcare, rather than volume, i.e., the number of services, entails reconciling different definitions of ‘value,” and assessing cost vs. quality. Stressing different metrics can lead to different, and possibly unfortunate, results. A Medicare effort to reduce hospital readmissions by lowering payments to hospitals with high readmission rates reduced these rates to a limited extent. Review of this program, moreover, underscored the need to anticipate potentially harmful effects of well-intended changes in policy or practice. Some studies of this Medicare program, but not all, indicated it also was associated with an increased risk of death.

Prospects for Future Savings

Serious concern about the increasing cost and share of U.S. GDP represented by healthcare spending has prompted extensive research and numerous proposals for reducing these costs—or at least tempering their current rate of increase. The complexity of the healthcare sector and the power of diverse private interests make any change challenging and politically difficult.

The urgency felt by both the public and government officials will keep the problem high on the public policy agenda. The growing enthusiasm for the ACA’s coverage and payment reforms may increase support for governmental action. Targeted and incremental changes likely would be more acceptable than a wholesale restructuring or a single-payer system. With cost reduction as the essential goal, changes affecting patients, providers, and payers will inevitably entail conflict and resistance.



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