Skyrocketing healthcare costs have been making headlines for the last three decades. Repeated policy solutions focused on financial and administrative remedies have been attempted–healthcare policy reform was a key domestic policy initiative under both Presidents Bush and Obama. President Bush initiated Medicare Part D, the largest overhaul of Medicare in the program’s history. President Obama’s signature legislation, the Affordable Care Act (ACA), has popularly become known as Obamacare.
To date, the policy results have been questionable. The greatest halting of healthcare costs came in the wake of the 2008 Recession–hardly a prescription for solving the problem.
Rather than hunting for more and better financial and administrative schemes, is it possible to just provide more and better care?
Before we dive into the question, it’s only fair to note that the full effects of the ACA will not be felt for years, or even decades. But one thing is certain: In comparison to other advanced economies, the United States spends far more on healthcare than other nations—about 2.5 times the average of the OECD (Organization for Economic Co-operation and Development). Even when looked at as a percentage of GDP, the United States fares a little better, but is still spending about twice as much as OECD countries and 1.5 times as much as the next-highest spending country, Norway.
But what are we getting for the exorbitant expenditures? Not physicians and not hospitals beds. Spending on physicians constitutes only about 10% of healthcare expenditures. In fact, the U.S. trails the OECD average with 2.4 practicing physicians per 1,000 population, compared to 3.1 among OECD nations. The number of hospital beds also lags considerably, at 2.6 beds per 1,000 population in the U.S. compared to the OECD average of 3.4.
We’ve previously covered the stunning administrative burden on our healthcare system. The United States leads the world in administrative healthcare costs. One of the key features of the ACA is a cap on administrative spending, setting a standard for what is commonly called the Medical Loss Ratio (MLR). Simply stated, insurers must spend a minimum of 80% of premium dollars on direct clinical expense and quality improvement. That’s a start, but estimates suggest that up to 36% of healthcare spending is on payer and provider administration.
That is the key to fixing healthcare spending in the United States—in order to decrease total expense and improve quality of care, administrative overhead payments need to become provider payments.
Using lightweight metrics to reward providers for high-quality treatment of chronic disease, we believe that this could be achieved. At a top level, it seems that there is ample room for savings, and a quick, back-of-the-envelope glance at the financials bears this out. Physician payments are about 10% of the total healthcare spending (15% of non-administrative expenses). A 30% increase in physician payments could improve the U.S. average from 2.4 physicians for 1,000 patients to the OECD average of 3.1. That would represent a shift of only 3% of total healthcare spending.
What would the net effect on healthcare outcomes be? If the targeted payments were tied to lightweight metrics on chronic disease management, the end result would likely be reduced costs, improved provider satisfaction, and better health outcomes.
Public health has a history of partnerships with healthcare to implement just such practices. Denver Public Health spearheaded one such initiative with regional healthcare providers to score and follow-up with patients and providers by providing a Point-of-Care Coronary Heart Disease Risk Score. The New York City Department of Public Health undertook an A1C initiative to track how well patients diagnosed with diabetes were managing their condition.
Chronic conditions such as these represent 75% of both administrative and non-administrative healthcare costs. By focusing on prevention, maintenance, adherence, and physician follow-up, these costs could be dramatically reduced. Again, some quick, back-of-the-envelope math shows that a 10% reduction in chronic disease spending could result in savings of 7.5% — more than double the amount that would be required to increase the number of U.S. physicians per 1,000 people from 2.4 to the OECD average of 3.1.
Admittedly, there are some assumptions involved in our quick math. There are additional support costs in addition to physician payments. Any metric, as lightweight as it may be, comes with some additional administration, especially when tied to payments. A 3% cut in administration must come from somewhere, even if it is arbitrary. Not every chronic condition can be easily tied to a single, representative metric. Clearly more detailed work needs to be done to bear out these assumptions and the many related details.
However, and most importantly, it is critical to the U.S. healthcare system that efforts such as these continue. The ARRA and ACA paved the way through the introduction of incentive payments for meaningful use. We need to build on this foundation to provide a return on the investment. If healthcare providers are doing an excellent job working with their patients to maintain A1C levels and good Framingham Scores, they deserve to be rewarded for it. In the end, we all come out ahead.