Wringing Costs Out of the Health Care System

We spend more than twice on health care than any other industrialized nationin the world, yet we don't have universal access and our outcomes areworse.  The reason we don't have universal access to quality health careis that too much of our health care spending -- our premiums, co-pays,prescriptions -- is wasted on profits, CEO bonuses and inefficienthealth care.

According to arecent CommonwealthFund report,16 percent of the US GDP is spent on health care, compared with 8 to 10percent in most major industrial nations.  Unless something is done tomoderate costs, total spending will double to over $4 trillion, or 20percent of GDP, by 2015.  Somestatesare already seeing these high levels ofspending. Conversely, serious cost controls can help contribute to the money needed toextend health care to all our citizens.  

In the absence of any meaningful federal action, states are once again leadingthe way.  This Dispatch will discuss how states are improvingquality of health care, forcing efficiency upon insurance companies, targetingprescription drug and hospital spending, and transforming the health caresystem from one that primarily treats illness to one that helps people stayhealthy -- all efforts to reduce health care costs and spending withoutsacrificing access to quality care.

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Quality as Cost Containment


Improving the quality of health care is essential to reducingcosts and unnecessary spending.  PennsylvaniaGov. Ed Rendell'sPrescriptionfor Pennsylvania is a comprehensive health care reformproposalthat stands out for its detailed measures to improve quality ofcare as a way to reduce costs and ensure access to affordable qualitycare for the state's 767,000 uninsured residents.  Gov.Rendell estimates that in 2005, the state incurred$7.6billion in unnecessary and avoidable costs due to hospital-acquiredinfections, medical errors, avoidable hospitalizations for chronic diseases,and other factors.

Sunshine Spurs Improvement:ConsumersUnion reports that public disclosure of medical errors will incentproviders to make improvements.  In 2005, thePennsylvania Health Care Cost ContainmentCouncil issued the first of any state report on hospital-acquiredinfections and found alarming statistics.  The report, which was based onmandatory reporting by hospitals, showed there were11,618confirmed infections in the state in 2004.  These infections, whichare largerly preventable, were associated with 1,793 deaths, an estimated205,000 extra days in the hospital, and an additional $2 billion in hospitalcharges.  There isevidence that theCouncil's work is leading to more aggressive action by hospitals to reducemedical errors.  For instance, death rates for certain heart surgerieshave dropped 48 percent since the mid-1990's.  This reduction coincidedwith the Council's reports on the mortality rates associated with theprocedures.

Infection Control and Patient Safety: Building on the work ofthe Cost Containment Council, Rendell's proposal would require hospitals toimplement infection control procedures that have already been pilotedsuccessfully at university and VA hospitals in the state.  In addition,the legislation requires hospitals to implement system-wide quality managementand error reduction and staff trainings systems.

Increasing Transparency: Prescription for Pennsylvania wouldcreate a consumer-friendly website to provide information on health carecosts, including hospital and other provider costs. Massachusetts,Maine, and several otherstates have such websites.  Additionally, legislation has already beenheard in committee requiringposting of pricesfor the most commonly prescribed prescription drugs

Electronic Medical Records: Following the lead ofDelaware,which is implementing the first statewide network of electronic clinicalinformation, Pennsylvania has created a commission to develop protocolsand a financing mechanism for electronic medical records ande-prescriptions.  Under the Governor's proposal, hospitals would berequired to implement an electronic records system in accordance to thespecifications set by the commission by September 2009.  The WashingtonState legislature has just approved a bill,HB2098, to promote more effective use of medical records.  AndNewYork City is announcing free software to providers that serve high volumesof Medicaid and uninsured patients.

Managing Chronic Disease: In Pennsylvania, 78 percent ofhealth care costs are attributable to 20% of patients.  These patientssuffer from chronic diseases that require focused management andevidence-based care.  Rendell proposes to bring all stakeholders togetherto create a chronic care management model for Pennsylvania.  The Governorwants to see public and private reimbursement that rewards compliance with thechronic care model and the state would develop training programs for patients,insurers, and providers in the implementation of the model and use ofevidence-based practices.   Vermont is already developing astatewide chronic care model calledBlueprint forHealth that promises to move the health care system to one that helpspeople stay healthy, rather than merely treating isolated acuteevents.   

Reducing Racial and other Disparities: It is well documentedthat people of color receivelower-quality health care than do whites.  Under Prescriptionfor Pennsylvania, the Department of Health will direct hospitals toreview their systems of care to determine how effective they are ateliminating disparities and institute improvements.  Hospitals willbe required to offer translation services and will work withproviders to improve cultural competency. 

Comprehensive health care reform is also movingin California,Oregon,Washington,Illinois,andPennsylvania. These proposals build on reforms inMaine, Vermont, andMassachusetts,that are working towards universal or near-universal health care.


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Paying for Performance (P4P)


A sure way to improve quality of care is to change how health care is paidfor.  Instead of just paying for every office visit, states and otherpayers are developing ways to pay for care that is quality andimproves outcomes. Initialstudies indicate that such systems provide significantly better healthcare results.  And, it means our health care dollars are being spent morewisely.  Currently, more thanhalfof US states have pay-for performance systems in their state Medicaidprogramsand 85percent of states expect to have such systems within 5 years.

In hospitals, P4P can reward hospitals for making sure that patientsreceive appropriate medications.  In physician's offices, practitionerscan be rewarded for keeping a diabetic's blood sugar at appropriatelevels.

Keys  to P4P systems are utilizing broadly accepted standards for carewhen measuring performance and health information technologies. 

  • The Oregon Health Care Quality Corporation, a statewide non-profit working to improve quality of care and information systems, is working with the state, health plans, medical groups, insurers, purchasers, providers and consumers to develop standardized performance measures into their P4P activities.

  • As part of his Prescription for Pennsylvania proposal, Gov. Rendell would bring together all stakeholders to develop a P4P system.  To lead the way, state-funded programs will identify "preferred providers" who meet quality standards for preferred compensation and patients who use providers in this network will have lower copayments and cost sharing.

  • Both California Governor Arnold Schwarzenegger and Assembly Speaker Fabian Nunez have offered comprehensive health care reform packages that incorporate both development or expansion of health information technologies and P4P systems for at least state-funded health care programs.

For providers that meet quality improvements and performance levels,incentives are provided in an array of ways, including bonuses, higher ratesof reimbursement, grants, and additional patient referrals. 

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Reducing Insurance Premiums - Spending More on Care, Less on Profits


Health care costs and spending drive insurance premiums.  After all,every band-aid, doctor visit, and MRI needs to be paid for -- as well as everyprofit margin and CEO bonus.  As these costs and spending rise, sotoo will premiums.  But there is much more states can do to ensurethat more of our premiums is spent on medical care and less onprofits andinefficientinsurance administration

Recently, the non-profit Blue Cross and Blue Shield of North Carolina, thestate's largest insurer, reportedprofits of $190 millionand a CEO compensation of $3.1 million.  Making matters worse,insurance premiums seem to rise and fall based on insurer's politicalfears of regulation, rather than economic cycles.  During the mid1990's, when national health care reform was last seriously debated, insurancepremiums rose at an annual rate of just 0.8%, the slowest rate ofincrease since the late 1980's.  Yet in recent years, insuranceadministrative costs have been the fastest-rising component of health carespending, with a 12% annual rate of increase.  This volatilitysuggests there is much more states can do to wring costs out of thehealth care system.

IncreasingMedical Loss Ratios: States can require insurers to spend more of thepremiums they charge on medical care and less on profits, bonuses, andadministrative costs.  California Gov. Schwarzenegger has proposed aloss-ratio of 85%, meaning insurance companies would have to spend 85 cents ofevery premium dollar on medical care, rather than profits and administrativecosts.  These regulations force insurers to be more efficient and makesure that premium dollars are paying for care and not paddingpockets.   States can also require standardized billing andpayment systems  that reduce administrative costs for insurers andproviders, who may face separate billing procedures for eachinsurance company.

RateTransparency and Approval: California Assemblyman Dave Jones hasintroduced legislationrequiringinsurersto obtain state approval for annual premium increases above 7%. Maine State Representative Sharon Treat has offereda HealthCare Bill of Rights that would strengthen review of premium ratefilings by requiring sufficient public notice, higher standards thatmust be met for rates to be approved, and a consumer advocate during ratefilings.  The bill would also make all information related to ratefilings public record.  

FairCommunity Rating:Coloradobill received initialapprovalin the House that would disallow insurers from penalizing smallbusinesses by charging higher premiums because of employee healthstatus.  Supporters point out that thebillis pro-small business because many small businesses have olderemployees who may have preexisting conditions.Community rating requires insurers to sell insurance to everyone atthe same price, although most states allow insurers to adjust communityrates based on certain factors, such as age, geography and industry. Insurers advocate for health status to be a factor in community rating laws,but after New Hampshire lawmakersallowed insurers to rate based on health status and geography in 2004, some ofthe states smallest firms saw rates rise 30% and others in rural parts of thestate saw increases of morethan 70%. The Legislature has since reversed itself. Community ratinghelps to spread risk across as large a population as possible, thereby helpingto make insurance premiums affordable to everyone and moderating them, inparticular, for older and ill people. 

InsuranceConnectors: FollowingMassachuetts'lead, several states are looking at creating Connectors, or new stateagencies, to act on behalf of small businesses andindividuals.  Typically, Connectors negotiate or contract withinsurers to offer plans through the Connector that meet set standards forcoverage and costs. Washingtonpassed legislation authorizing a pilot "connector" program that will negotiatewith insurers on behalf of a larger pool of individuals and smallbusinesses.  In Connecticut, a proposal creating theConnecticutConnector is moving through the legislature which would serve as apurchasing pool for previously uninsured individuals and small businessesoffering them various health insurance plans through a private non-profitinsurer.


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Targeting Prescription Drug and Hospital Costs


As we have detailed in previous editions of the Stateside Dispatch, stateshave worked hard toreinin drug costs and regulate the prescribing practices of medicalprofessionals. 

  • Through Medicaid programs, states are using their purchasing power to lower drug costs through Preferred Drug Lists and negotiated bulk purchasing.  
  • Additionally, states are becoming more aggressive at countering and exposing the marketing tactics of big pharmaceutical companies.  
  • Counter-detailing programs are providing physicians with unbiased clinical information about drugs to counter industry sales pitches and marketing disclosure laws to shed light on drug company payments to doctors to influence their and their peers' prescribing habits. 

In contrast to prescription drugs, state regulation of hospital costs andspending have lagged in recent years. Hospitals inColorado,Oregon,Massachusetts,andoverallnationally are seeing some of their highest profits in years and the rateof hospital construction is at its highest point over the past 50 years.Hospitals deserve more scrutiny from lawmakers for the simple reason that theyaccount for thesinglelargest area of health care spending.

A bill in Maine would seek to reintroduce the practice ofhospitalrate setting while preserving quality and access. Rate settingwas commonplace in most states before managed care vaulted onto the healthcare scene in the late 80s and 90s. 

On a related note, US Senator Charles Grassley has asked the GovernmentAccountability Office toinvestigatenon-profit hospitals to help determine if they deserve the billions in taxbreaks they receive for that status.  Aprevious GAO reportfound only marginal difference in levels of uncompensated andcharity care provided by for-profit versus non-profit hospitals. The IRS no longer specificies what hospitals must do or services it mustprovide to their communities to receive tax-exempt status.  Makingmatters worse, theIRS has beenlax in its auditing of non-profit hospitals.  


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Problems with Consumer-Driven Health Plans - the Need for Fairness in Cost Sharing


Even though consumer-driven health plans, or high deductibleinsurance, arenotcatching on with consumers, the Right continues to cite them asthe panacea to our expensive health care system.  They argue that puttingmore purchasing responsibility on consumers will lead them to avoidunnecessary health care, therefore reducing spending and costs.  Studieshave shown repeatedly, however, that high deductible insuranceleads people to avoidboth necessary and unnecessary care, which simply puts off spending tolater and more costly stages of illness.  Additionally,because 10percent of the population accounts for 70 percent of health carecosts, most health care spending is beyond the reach of financialincentives imposed by high deductibles.   

A Welcome Departure: In a creative twiston consumer-driven health plans, starting this fall,smallbusinesses in Rhode Island will be able to enroll in comprehensiveinsurance for about $300 a month with a $5,000 deductible. The twist, however,is that you can avoid the high deductible if you take a "wellness" pledge andparticipate in various wellness initiatives, like having a primary caredoctor, taking a health risk assessment and following recommendations forimproving your health.  In addition to a lower deductible, you get lowerco-pays and lower overall cost-sharing, plus free annual physicials,mammograms and prostate-cancer screenings.

Making Cost-Sharing Fair to All IncomeLevels: A problem with consumer-driven health plans, as conceived bythe Right, is that they don't take into account the very obvious fact thathigh deductibles and other cost-sharing is little deterrence to the wealthywhile it can be punishing to lower income people. This forces us toask, "what is affordable?"  States are starting to look at ways tocap total health care expenditures to the income scale, using sliding scalesto protect people from spending huge portions of their income on health care.

Relating Premiums to Income: Promisingaffordable options, the Massachusetts health care reform law requires allresidents to obtain coverage by July 2007.  However, amid lingeringconcerns that evenrevisedpremiums might still be too high for many of the state's uninsured,Massachusetts regulators have voted toexempt20% of the uninsured from the individual mandate. 

They are basing these exemptions, in part, on the determination thataffordability means spending up to about 10% of income onpremiums.  For instance,a single personearning just over $40,000 a year would pay no more than 9 percent of herincome, or $300 a month, on premiums; while an individual earning $25,000would pay no more than 3.3% of income, or $70 a month.  This is a welcomemodel because it ties costs directly to people's available resources. However, Massachusetts regulators are not including deductibles, whichwill rangefrom $0 to $2,000, co-pays and other cost-sharing which can easily doublewhat people pay in annual premiums.   

Capping Total Health Care Costs: Asimilar approach is being pursued by legislators in Maine who seek to tiepremiums for the state's subsidized insurance program,calledDirigoChoice, to an even lower income scale.  Under LD1716 enrollees with incomes below 250% of poverty would getDirigoChoice coverage at no charge.   Those between 251% and300% of the poverty line would spend no more than 0.5% of their taxable incomeon coverage.  From 301% to 350% of poverty, enrollees would pay nomore than 1% of their taxble income.  The scale would increase similarlyup to a maximum of no more than 10% of taxable income being spent for coverageunder the program.


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Our system needs more than universal coverage.  With hugeprofits for pharmaceutical companies, insurance companies, and someof the largest hospital systems, states are increasingly stepping into advocate on behalf of consumers and businesses and ensure access toquality and efficient health care.  And states have the power to shiftour system from one that prioritizes the treatment of one-time events to onewith a greater emphasis on helping people stay healthy and avoidillness.   


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