Wringing Costs Out of the Health Care System

Monday, April 16, 2007

Wringing Costs Out of the Health Care System

Valuing Families

by Adam Thompson

Wringing Costs Out of the Health Care System

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

According to a recent Commonwealth Fund report, 16 percent of the US GDP is spent on health care, compared with 8 to 10 percent in most major industrial nations.  Unless something is done to moderate costs, total spending will double to over $4 trillion, or 20 percent of GDP, by 2015.  Some states are already seeing these high levels of spending.  Conversely, serious cost controls can help contribute to the money needed to extend health care to all our citizens.  

In the absence of any meaningful federal action, states are once again leading the way.  This Dispatch will discuss how states are improving quality of health care, forcing efficiency upon insurance companies, targeting prescription drug and hospital spending, and transforming the health care system from one that primarily treats illness to one that helps people stay healthy -- all efforts to reduce health care costs and spending without sacrificing access to quality care.

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Quality as Cost Containment

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

Sunshine Spurs Improvement: Consumers Union reports that public disclosure of medical errors will incent providers to make improvements.  In 2005, the Pennsylvania Health Care Cost Containment Council issued the first of any state report on hospital-acquired infections and found alarming statistics.  The report, which was based on mandatory reporting by hospitals, showed there were 11,618 confirmed infections in the state in 2004.  These infections, which are largerly preventable, were associated with 1,793 deaths, an estimated 205,000 extra days in the hospital, and an additional $2 billion in hospital charges.  There is evidence that the Council's work is leading to more aggressive action by hospitals to reduce medical errors.  For instance, death rates for certain heart surgeries have dropped 48 percent since the mid-1990's.  This reduction coincided with the Council's reports on the mortality rates associated with the procedures.

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

Increasing Transparency: Prescription for Pennsylvania would create a consumer-friendly website to provide information on health care costs, including hospital and other provider costs.  Massachusetts, Maine, and several other states have such websites.  Additionally, legislation has already been heard in committee requiring posting of prices for the most commonly prescribed prescription drugs

Electronic Medical Records: Following the lead of Delaware, which is implementing the first statewide network of electronic clinical information, Pennsylvania has created a commission to develop protocols and a financing mechanism for electronic medical records and e-prescriptions.  Under the Governor's proposal, hospitals would be required to implement an electronic records system in accordance to the specifications set by the commission by September 2009.  The Washington State legislature has just approved a bill, HB 2098, to promote more effective use of medical records.  And New York City is announcing free software to providers that serve high volumes of Medicaid and uninsured patients.

Managing Chronic Disease: In Pennsylvania, 78 percent of health care costs are attributable to 20% of patients.  These patients suffer from chronic diseases that require focused management and evidence-based care.  Rendell proposes to bring all stakeholders together to create a chronic care management model for Pennsylvania.  The Governor wants to see public and private reimbursement that rewards compliance with the chronic care model and the state would develop training programs for patients, insurers, and providers in the implementation of the model and use of evidence-based practices.   Vermont is already developing a statewide chronic care model called Blueprint for Health that promises to move the health care system to one that helps people stay healthy, rather than merely treating isolated acute events.   

Reducing Racial and other Disparities: It is well documented that people of color receive lower-quality health care than do whites.  Under Prescription for Pennsylvania, the Department of Health will direct hospitals to review their systems of care to determine how effective they are at eliminating disparities and institute improvements.  Hospitals will be required to offer translation services and will work with providers to improve cultural competency. 

Comprehensive health care reform is also moving in California, Oregon, Washington, Illinois, and Pennsylvania.  These proposals build on reforms in Maine, Vermont, and Massachusetts, 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 paid for.  Instead of just paying for every office visit, states and other payers are developing ways to pay for care that is quality and improves outcomes.  Initial studies indicate that such systems provide significantly better health care results.  And, it means our health care dollars are being spent more wisely.  Currently, more than half of US states have pay-for performance systems in their state Medicaid programs and 85 percent of states expect to have such systems within 5 years.

In hospitals, P4P can reward hospitals for making sure that patients receive appropriate medications.  In physician's offices, practitioners can be rewarded for keeping a diabetic's blood sugar at appropriate levels.

Keys  to P4P systems are utilizing broadly accepted standards for care when 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 rates of 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 every profit margin and CEO bonus.  As these costs and spending rise, so too will premiums.  But there is much more states can do to ensure that more of our premiums is spent on medical care and less on profits and inefficient insurance administration

Recently, the non-profit Blue Cross and Blue Shield of North Carolina, the state's largest insurer, reported profits of $190 million and a CEO compensation of $3.1 million.  Making matters worse, insurance premiums seem to rise and fall based on insurer's political fears of regulation, rather than economic cycles.  During the mid 1990's, when national health care reform was last seriously debated, insurance premiums rose at an annual rate of just 0.8%, the slowest rate of increase since the late 1980's.  Yet in recent years, insurance administrative costs have been the fastest-rising component of health care spending, with a 12% annual rate of increase.  This volatility suggests there is much more states can do to wring costs out of the health care system.

Increasing Medical Loss Ratios: States can require insurers to spend more of the premiums they charge on medical care and less on profits, bonuses, and administrative costs.  California Gov. Schwarzenegger has proposed a loss-ratio of 85%, meaning insurance companies would have to spend 85 cents of every premium dollar on medical care, rather than profits and administrative costs.  These regulations force insurers to be more efficient and make sure that premium dollars are paying for care and not padding pockets.   States can also require standardized billing and payment systems  that reduce administrative costs for insurers and providers, who may face separate billing procedures for each insurance company.

Rate Transparency and Approval: California Assemblyman Dave Jones has introduced legislation requiring insurers to obtain state approval for annual premium increases above 7%.  Maine State Representative Sharon Treat has offered a Health Care Bill of Rights that would strengthen review of premium rate filings by requiring sufficient public notice, higher standards that must be met for rates to be approved, and a consumer advocate during rate filings.  The bill would also make all information related to rate filings public record.  

Fair Community Rating:Colorado bill received initial approval in the House that would disallow insurers from penalizing small businesses by charging higher premiums because of employee health status.  Supporters point out that the bill is pro-small business because many small businesses have older employees who may have preexisting conditions. Community rating requires insurers to sell insurance to everyone at the same price, although most states allow insurers to adjust community rates 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 lawmakers allowed insurers to rate based on health status and geography in 2004, some of the states smallest firms saw rates rise 30% and others in rural parts of the state saw increases of more than 70%. The Legislature has since reversed itself. Community rating helps to spread risk across as large a population as possible, thereby helping to make insurance premiums affordable to everyone and moderating them, in particular, for older and ill people. 

Insurance Connectors: Following Massachuetts' lead, several states are looking at creating Connectors, or new state agencies, to act on behalf of small businesses and individuals.  Typically, Connectors negotiate or contract with insurers to offer plans through the Connector that meet set standards for coverage and costs.  Washington passed legislation authorizing a pilot "connector" program that will negotiate with insurers on behalf of a larger pool of individuals and small businesses.  In Connecticut, a proposal creating the Connecticut Connector is moving through the legislature which would serve as a purchasing pool for previously uninsured individuals and small businesses offering them various health insurance plans through a private non-profit insurer.

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Targeting Prescription Drug and Hospital Costs

As we have detailed in previous editions of the Stateside Dispatch, states have worked hard to rein in drug costs and regulate the prescribing practices of medical professionals. 

  • 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 and spending have lagged in recent years. Hospitals in Colorado, Oregon, Massachusetts, and overall nationally are seeing some of their highest profits in years and the rate of hospital construction is at its highest point over the past 50 years. Hospitals deserve more scrutiny from lawmakers for the simple reason that they account for the single largest area of health care spending.

A bill in Maine would seek to reintroduce the practice of hospital rate setting while preserving quality and access.  Rate setting was commonplace in most states before managed care vaulted onto the health care scene in the late 80s and 90s. 

On a related note, US Senator Charles Grassley has asked the Government Accountability Office to investigate non-profit hospitals to help determine if they deserve the billions in tax breaks they receive for that status.  A previous GAO report found only marginal difference in levels of uncompensated and charity care provided by for-profit versus non-profit hospitals.  The IRS no longer specificies what hospitals must do or services it must provide to their communities to receive tax-exempt status.  Making matters worse, the IRS has been lax in its auditing of non-profit hospitals.  

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Valuing Families

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

Even though consumer-driven health plans, or high deductible insurance, are not catching on with consumers, the Right continues to cite them as the panacea to our expensive health care system.  They argue that putting more purchasing responsibility on consumers will lead them to avoid unnecessary health care, therefore reducing spending and costs.  Studies have shown repeatedly, however, that high deductible insurance leads people to avoid both necessary and unnecessary care, which simply puts off spending to later and more costly stages of illness.  Additionally, because 10 percent of the population accounts for 70 percent of health care costs, most health care spending is beyond the reach of financial incentives imposed by high deductibles.   

A Welcome Departure: In a creative twist on consumer-driven health plans, starting this fall, small businesses in Rhode Island will be able to enroll in comprehensive insurance 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 and participate in various wellness initiatives, like having a primary care doctor, taking a health risk assessment and following recommendations for improving your health.  In addition to a lower deductible, you get lower co-pays and lower overall cost-sharing, plus free annual physicials, mammograms and prostate-cancer screenings.

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

Relating Premiums to Income: Promising affordable options, the Massachusetts health care reform law requires all residents to obtain coverage by July 2007.  However, amid lingering concerns that even revised premiums might still be too high for many of the state's uninsured, Massachusetts regulators have voted to exempt 20% of the uninsured from the individual mandate. 

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

Capping Total Health Care Costs: A similar approach is being pursued by legislators in Maine who seek to tie premiums for the state's subsidized insurance program, called DirigoChoice, to an even lower income scale.   Under LD 1716 enrollees with incomes below 250% of poverty would get DirigoChoice coverage at no charge.   Those between 251% and 300% of the poverty line would spend no more than 0.5% of their taxable income on coverage.  From 301% to 350% of poverty, enrollees would pay no more than 1% of their taxble income.  The scale would increase similarly up to a maximum of no more than 10% of taxable income being spent for coverage under the program.

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Valuing Families


Our system needs more than universal coverage.  With huge profits for pharmaceutical companies, insurance companies, and some of the largest hospital systems, states are increasingly stepping in to advocate on behalf of consumers and businesses and ensure access to quality and efficient health care.  And states have the power to shift our system from one that prioritizes the treatment of one-time events to one with a greater emphasis on helping people stay healthy and avoid illness.   

More Resources


Wringing Costs Out of the Health Care System

Commonwealth Fund - Slowing the Growth of US Health Care Expenditures: What Are the Options?

Commonwealth Fund - State Innovations

Progressive States Network - Cutting Health Care Costs

Progressive States Network - Health Care in 2007

Families USA - State Information: Across the States

Quality as Cost Containment

Commonwealth Fund - Hospital Quality Improvement: Strategies and Lessons from US Hospitals

Commonwealth Fund - Quality Improvement and Efficiency

National Academy for State Health Policy - Strategies to Reduce Racial and Ethnic Health Disparities

National Quality Forum - Navigating Quality

Progressive States Network - Universal Health Care's Next Steps - PA & IL Plans

Paying for Performance (P4P)

The Commonwealth Fund - Pay-for-Performance in State Medicaid Programs: A Survey of State Medicaid Directors and Programs

Center for Health Care Strategies - Physician Pay-for-Performans in Medicaid: A Guide for States

New England Journal of Medicine - Pay for Performance, Recommendations of the Institute of Medicine

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

Families USA - Establishing a Medical Loss Ratio

Center on Budget and Policy Priorities - Lessons from New Hampshire

North Carolina Justice Center - Making Blue Cross Act Like a Nonprofit Again

Targeting Prescription Drug and Hospital Costs

National Legislative Association on Prescription Drug Prices - Model Legislation: Marketing Restrictions and Disclosure

Progressive States Network - Reining in Prescription Drug Costs

Journal of the American Medical Association - Pharmaceutical Company Payments to Physicians: Early Experience with Disclosure Laws in Vermont and Minnesota

National Legislative Association on Prescription Drug Prices - PhRMA Watch and Advertising and Marketing

Prescription Policy Choices' Best Practices

Families USA - A Pound of Flesh: Hospital Billing, Debt Collection, and Patients' Rights

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

Center for Studying Health System Change - Behind the Slow Growth of Employer-Based Consumer Driven Health Plans

Progressive States Network - The Bad Medicine of Consumer-Driven Health Plan

Commonwealth Fund - Health Savings Accounts and High-Deductible Health Plans: Why they Won't Cure What Ails US Health Care

Kaiser Family Foundation - Effect of Tying Eligibility for Health Insurance Subsidies to the Federal Poverty Level

Families USA - HSAs: Shop While You Drop?

Eye on the Right

The argument goes that avaricious trial lawyers are pushing malpractice insurance rates up, squeezing doctors and thereby compromising access. Well, it seems that executive pay and soaring insurer profits may be part of the cause. An industry backed bill passed in 2005 capped malpractice awards. But it seems that the purported benefits still haven't reached the doctors, many of whom lobbied alongside their malpractice insurers. Let it be a lesson, in the end the insurers got the last laugh.

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The Stateside Dispatch is written and edited by:

Nathan Newman, Policy Director
Mijin Cha, Policy Specialist
Adam Thompson, Policy Specialist
John Bacino, Communications Associate


Please shoot me an email at if you have feedback, tips, suggestions, criticisms, or nominations for any of our sidebar features.

John Bacino
Editor, Stateside Dispatch


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