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Are Health Care Costs Increasing or Decreasing?

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Pat Stricker, RN, MEd, Senior Vice President, TCS Healthcare Technologies
Last month’s article discussed value-based purchasing (VBP). The day after I wrote the article, I attended a seminar organized by the California Association of Health Plans entitled "Using Data to Improve Healthcare". It definitely reinforced the principles of VBP, and the need for and importance of data to prove its effectiveness.

Government and large purchasers want cost and quality data to drive affordability; clinicians want patient-specific data to improve treatments; and health plans and providers are working on integrating medical-record data to effectively manage care. The seminar focused on how these three efforts are dependent on data and how that data can be used to meet each of their goals.

The goals go hand-in-hand with the key principles of VBP:

1. Standardized Performance Data Collection and Measurement
The measurement of health plans, hospitals, physician groups, individual practitioners, and consumers needs to be based on actionable information for informed decision-making regarding cost, quality, and appropriateness of care.

2. Measurement Transparency and Public Reporting
Transparency in health care costs and quality are essential. It is difficult for consumers to make value-based decisions without having validated price and quality information before costs occur.

3. Payment Innovation
Provider reimbursements need to be based on demonstrated performance and desired outcomes.New reimbursement models reward providers for keeping patients healthy, not just for treating their illnesses.

4. Informed Consumer Choice
A key element of VBP is individual consumer choice based on value.Consumers must be provided with clear information, incentives and coaching to help them make better-informed decisions, change their behaviors, and self-manage their health.

The sessions on health care costs and price transparency explained how data is used to improve the principles of VBP. The statistics presented were very interesting and I would like to share some of them with you.

The Center for Disease Control (CDC) reports that in 1960 the total cost of care (cost to patient and health plan) was 5% of our Gross National Product (GNP). The cost has continued to increase over the years, but it has remained at 17.4% since 2009.

A report from the Centers for Medicare and Medicaid Services (CMS) shows health care costs for 2013:

  • Increased from 2012 by 3.6% to $2.9 trillion ($9,225/person)
  • Provided the 5th consecutive year of slower growth (between 3.6% and 4.1%)
  • Increased, but at a slower rate for the following categories
         -Hospital Spending: 4.3%; down from 5.7% in 2012
         -Physician and Clinical Services: 3.8%; down from 4.5%
         -Other Professional Services (PT, Optometry, Podiatry, and Chiropractic): 4.5%; down from 5.0%
         -Dental: 0.9%; down from 2.2%
         -Home Health: 3.4%; down from 4.5%
         -Durable Medical Equipment: 4.2%; down from 5.6% 
  • Remained the same or increased at a higher rate for the following categories:
         -Other Health, Residential, and Personal Care Services (schools, community centers, ambulance services,
           mental and substance abuse): 5.8%; the same rate as in 2012
         -Nursing Care And Retirement Homes: 2.4% increase; up from 2.0%
                  -The faster growth in 2013 was primarily due to an increase in Medicare spending after
                    a one-time downward rate adjustment for skilled nursing facilities in 2012.
         -Prescription Drugs: 2.5% increase; up from 0.5% in 2012
         -Other Non-durable Medical Products (over-the-counter medicines, medical instruments, and surgical dressings):
           4.0% increase; up from 1.8% in 2012

A 2013 study presented at the seminar by Integrated Healthcare Association found the following about costs for patients who were cared for by physician organizations participating in pay-for-performance:

  • The top 1% of costliest patients accounted for 28% of total costs
  • The costliest 5% accounted for 47% 
  • The costliest 10% accounted for 57.4% 
  • The lowest cost half of patients (50%) accounted for only 10% of costs

The California Health Care Foundation (CHCF) is an organization dedicated to improving access to coverage and care; ensuring high-value care; and informing decision-makers. To accomplish this, they support testing and evaluation of innovative approaches to improving care and commission research and analysis to help policy makers, clinical leaders, payers, consumers, and the media better understand California’s complex delivery system. Their Health Care Costs 101 article provides the following detailed data from 2010:

  • The elderly population, 65 and over, accounted for 33% of health spending but made up just 13% of the population.
  • Average health care costs for females were 25% more than for males, primarily due to higher spending in the childbearing years and after age 85.
  • Prescription drug spending grew at its slowest pace on record, increasing only 0.5%, as generic drugs replaced blockbuster drugs that lost patent protection.
         -This trend was reversed in 2013, as prescription drug costs increased to 2.5%.
  • Medicare spending was at 4.8%, slightly higher than the overall average, while private insurance was at 3.2%, closer to the average.
  • Public health insurance accounted for 39% of health spending compared to 33% for private health insurance.
  • Health care spending consumed 42% of federal revenues and 6% of household income.

The CHCF has numerous other reports and studies on their website, as well as an interesting interactive graphic that shows the change in national health care spending by payers from 1960 to 2011, identifying the costs by type, product, and payer. This is definitely worth reviewing.

A 2013 report on Trends in Health Care Cost Growth and the Role of the Affordable Care Act (ACA) analyzed recent trends in health care costs, the forces driving those trends, and their likely economic benefits. The report found that, while health care spending continues to increase each year, it has slowed considerably in the past few years. For example:

  • Per capita spending has grown at an estimated average annual rate of just 1.3% since 2010
         -This is the lowest rate on record for any three-year period
         -It is less than one-third the long-term historical average annual growth rate of 4.5% stretching back to 1965
  • Health care price inflation (1% on a year-over-year basis) is at its lowest rate in 50 years

While the causes of the slowdown are not yet fully understood, the analysis of the current data suggests it is more than just a result of the 2007- 2009 recession, as it has persisted even as the economy is recovering; is reflected in health care prices, not just utilization or coverage; and has shown up in Medicare, which is more insulated from economic trends. The slowdown appears to reflect "structural" changes in the U.S. health care system.

However, an early analysis by the Altarum Institute research group, reported in February 2015, suggests that health care spending for 2014 may be increasing again - up to 5% from 3.6% in 2013. This rise was not totally unexpected, as millions of Americans gained health coverage through the ACA exchanges, Medicaid programs were expanded, and additional jobs were created by employers. Analyzing all the data for the entire year will take time, so we will have to wait until the end of 2015 for the final official 2014 results.

It is encouraging to see that, even though total health care costs continue to rise, they are increasing at a slower rate. While the percentages of decreased spending are small, the trend is going in the right direction – DOWN. Let’s hope that this trend continues and before long total health care costs will actually be decreasing each year. Hopefully that will become a reality in the near future.

To contact Pat, email her at, or call her at (530) 886-1700, ext. 215.

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