Rising Health Care Costs:
Can we Move Towards
Higher-Value Care?
Katherine Baicker
Professor of Health Economics
Harvard School of Public Health
1
Lower Costs vs. Higher Value
• Rising costs and uninsurance have made reform a priority, but should
be focused on value, not just costs
– Higher spending driven not by changes in number of physician visits or
hospitalizations, but by intensity of treatment
– Many payment schemes encourage quantity, not quality
– Dulled incentive to develop cost-saving technologies
• Appeal of cost-saving quality improvements
– Self-financing plans to cover the uninsured
– Health-improving reductions in spending
– Elimination of waste, fraud, and abuse
• But is this the right metric?
– Worthwhile reforms that improve value may or may not save money
2
Ample Evidence of Inefficient Spending
• International evidence:
– Spend much more than OECD trading partners without commensurately
better outcomes
Infant Mortality Rates (per 1,000 Live Births) by OECD Country, 1960-2003
Internation Comparison
Health Expenditures as a Share of GDP
Percentage of GDP
Deaths per 1,000 Live Births
35
16
United States
30
Canada
Germany
Japan
United Kingdom
United States
14
12
Canada
France
25
10
Japan
Sweden
United
States
20
Switzerland
Median
8
15
6
10
4
5
2
0
1960
0
1960
1965
1970
1975
1980
1985
1990
1995
2000
1965
1970
1975
1980
1985
1990
1995
2000
Source: OECD
Source: OECD
• Domestic evidence:
– Areas where we spend more are not areas with best outcomes
3
Quality Variation Even within Medicare
Source: Dartmouth Atlas of Health Care
4
Variation in Medicare Spending
Source: Dartmouth Atlas of Health Care
5
Higher Spending Does Not Necessarily Lead to Higher Quality
Source: Baicker and Chandra (Health Affairs 2004)
6
Some Causes of Inefficiency
• Public side:
– Medicare reimbursement primarily based on quantity, not quality
– Resources for the uninsured spent on inefficient modes of care
• Private side:
– Biases in tax subsidy of employment-based insurance
– Barriers to well-functioning insurance markets
– Information on prices and quality often not available
7
Consequences of Inefficient Spending
• Health care dollars not allocated to highest value uses
– Reimbursement rates drive health consumption decisions
– Rising ranks of uninsured break down risk-pooling and lead to inefficient
care for uninsured
• Slower wage growth
– Rising health insurance premiums have reduced wage growth by as much
as 25% in the past five years
– May exacerbate job-lock
• Increasing pressure on taxpayers to finance governmentprovided insurance
– Rapidly rising deadweight loss
– Current path of spending growth is unsustainable
8
The President’s Proposal
• Standard Deduction for Health Insurance
– Anyone covered by a private policy would get standard deduction
(regardless of source or premium)
– Replaces current exclusion of employment-based insurance
– Goal of eliminating biases in the tax code and improving efficiency
• Affordable Choices Initiative
– Goal of giving states extra flexibility and resources to cover hard-to-insure
poor and chronically ill
• Ongoing efforts to expand access to information and
affordable insurance
9
Evaluating Effects
Uninsured
•
How many fewer uninsured people?
Individual purchasers
•
Effect on non-group market?
The New Standard Deduction for Health Insurance Makes the Tax
Codes More Progressive
Tax Change as a % of Income (2007)
Percent
0.2
Quintiles
0.1
People insured through jobs
•
Effects on number covered,
generosity of plans?
0.0
-0.1
-0.2
1st
2nd
3rd
4th
5th
Top
10%
Top
5%
Top
1%
-0.3
-0.4
-0.5
Budget
• Overall effect on budget?
• Distribution of benefits?
• Effect on growth of health spending?
-0.6
-0.7
Note: Quintiles begin at: 2nd $13,310; 3rd $28,507 ; 4th $50,448; 5th $87,758; top
10% $128,676; top 5% $177,816; top 1% $432,275.
Source: U.S. Department of the Treasury, Office of Tax Analysis.
Quality
• Effect on value of care and
insurance?
10
Other Proposals
• Reforming tax-treatment of health insurance plays major
role in many (Republican) candidates’ proposals
– Variants include refundable tax credit
• Clearly only one piece of puzzle
– Many cost-containment proposals focus on low-hanging fruit, but
can’t count on covering uninsured, saving lives, and saving money
– Focusing on combination of value-improving strategies that have
system-wide effects likely to generate most bang for the buck
11
Focus on Changes with System-wide Effects
• Interventions that affect the care received by some groups
likely to have “spillover” effects
–
–
–
–
Insurance coverage – extent and type
Use of high-intensity interventions
Information
Use of “best practices”
• Few individual interventions likely to produce better health at
lower cost
– Doesn’t mean there aren’t many worthwhile interventions
– Probably willing to pay more if getting a lot more health for it
12