By Charles M. Arlinghaus

September 2007

Too much of the discussion of the increase in health care costs implicitly views consumers as unchanging commodities and tries to shift costs for a fixed set of events from one set of payers to another. But just as tax policy must consider the dynamic effects of economic growth and changing incentives, health policy too must have a dynamic, pro-growth (or pro-health) component.

Ultimately people are not unchanging commodities who “get sick” a set number of times. The bulk of health care spending – 75% of the total and as much as 96% of Medicare spending – is spent not on a patient with a fixable episode or two but people with long term chronic conditions that in many cases can be controlled to both keep the patient healthier but also to reduce the overall cost of health care. Policy leaders should move beyond static analysis and cost-shifting plans to a system that can manage costs by managing disease and the chronic conditions that dominate health care spending.

There are literally dozens of changes that can and should be made to the health care system to reduce costs, increase responsibility, and lead to greater health. Nothing that follows is intended to discourage those other good ideas or suggest they are a waste of time. However, too little attention is paid to the construct of systems, whether privately paid or supported with tax dollars, that focus on an archaic notion of episodic care when the evidence suggests that chronic, longer term conditions contribute to the lion’s share of spending and hold the greatest potential for cost savings for all participants. Already, some programs are beginning that encourage cost savings by creating incentives for healthier consumers who then save the company or taxpayer money by spending less on health care.

 

Health Insurance in New Hampshire

The rapidly increasing cost of health care and insurance premiums has driven health care costs to the forefront of both state and national policy debates. In recent years, New Hampshire has led the nation in the cost of insurance. The average cost of a private family health insurance policy in New Hampshire rose from $6185 in 1998 to $11,835 in 2005,[1] an annual increase of an average of 9.7%. The national average has also increased by about 9.7% per year, from $5590 in 1998 to $10,728 in 2005.

For state workers, the increases have been significantly worse and New Hampshire has been worse than the rest of the country.  According to the National Conference of State Legislatures, family coverage for a state employee in the United States increased from $5,589 in 1999 to $12,152 in 2006, an average increase of $11.7% each year. According to the same study, from 1999-2006, New Hampshire’s costs rose from $5,945 to $22,634, an annual increase of an astounding 21%.[2] In 1999, New Hampshire spent 6% more than the national average. Seven years later, family coverage for state employees costs 86% more than in the average state.[3]

In seven years, the cost of an employee with family coverage increased by $16,700. That’s an additional $16,700 that went into health care benefits rather than increased salaries or hiring more employees. It is simple economics that an increase of $16,000 in benefit costs leaves $16,000 less available for raises. For the employer, whether the cost is paid as salary or insurance is all the same. But many employees are unaware of the cost or value of their benefit package and first notice the increased health costs as their potential take home pay diminishes.

Across the country, the amount of wages that is paid in the form of insurance premiums instead of traditional salary is rising. According to the Kaiser Foundation’s annual studies of health insurance premiums and workers’ earnings, from 2000 to 2006 health insurance premiums increased by a total of 86.5% while nominal earnings increased 19.6%.[4]

 

The Cost of Health Care

The cost of insurance has been an election issue in each of the last three elections. In many political debates, the discussion resorts to finding a new scapegoat and looking for blunt instruments not to deliver better care more efficiently but to apply price controls or ration care. More directly, costs are an issue for every business during annual insurance renewals and in the negotiation of a new state employee contract. Unfortunately, most of those discussions take the form a debate over cost-shifting.

 

The Increasing Burden

Insurance costs reflect a variety of costs but nothing impacts them as much as the total cost of health care. Both nationally and in state, the total cost of health care has been increasing significantly faster than the rate of inflation. From 1984 through 2004, the total cost of personal health care[5] in the United States rose from $338 billion to $1,551.3 billion.[6] The annualized rate of increase is 7.9% per year.

New Hampshire’s expenditures have grown a bit faster, probably because of greater than average population growth. From 1984-2004, New Hampshire’s spending grew from $1.15 billion to $7.01 billion, an annual rate of 9.4%. In New Hampshire,[7] growth was 11.3% annually from 1984-94 but has slowed to 7.6% from 1994-2004.[8]

Unsustainable growth

The federal government projects total health care spending to increase from$1,858 billion in 2004 to $3,628 in 2014, about 7% each year. If New Hampshire’s personal health care costs increase at a similar rate, our costs would rise from $7.1 billion today to $13.8 billion in 2014.[9]

As we’ve seen, regular insurance premium increases that far exceed the rate of inflation eat into workers visible wages and will drive up the cost of hiring new workers. But perhaps more alarming is the huge burden rising health care costs place on state and federal budgets. Annual increases of 21% for seven years in the costs of state employee insurance is the tip of the iceberg.

Health insurance growth rates have slowed somewhat but are still rising faster than the rate of inflation and historical growth in tax collections, the money available to be spent. As baby boomers age and move toward retirement, they also move toward the age when they consume more health care dollars, most of which are paid for by tax dollars in the Medicare and Medicaid programs.

New Hampshire economist Brian Gottlob of Polecon Research has studied the demographic trend looking toward the future. Medicaid vendor payments currently consume about 40% of the state budget. If no changes to eligibility were made and if government revenue grew at its historic average, an aging population would drain the state budget. In about fifteen years, Medicaid payments would consume the entire state general fund budget. While such a scenario would never literally happen, it illustrates how an unchecked rise in Medicaid spending would crowd out other state priorities and force significant spending reductions or tax increases.[10]

What drives spending?

Many reform efforts focus on dividing up total spending and reducing certain categories. The federal statistics upon which almost all analysis is based divide health care spending into categories based largely on type of service or provider. So total spending on hospitals or on prescriptions or medical devices are broken out.[11] While this information can be useful, it leads to a focus not on causes but on provision and location of care. Data categorized in such ways tells us little about whether one form of care replaced another or is more cost effective. For example, someone with asthma who significantly increases prescription spending for an antihistamine or an inhaler but avoids increased emergency room spending is difficult to tease out of the costs. In that case, prescription drugs are not driving up the cost of health care, asthma is.

New Hampshire has first hand experience with the limitations of such analysis. Concerned about growing prescription drug costs in the 1980s, New Hampshire placed a three prescription reimbursement limit on Medicaid patients with schizophrenia. The cap effectively controlled prescription costs for those patients. However, those patients also experienced a significant rise in emergency mental health services and health clinic visits. According to a study in the New England Journal of Medicine, the increased health care costs were 17 times the amount saved on prescription use.[12] There are few better illustrations of the phrase “penny-wise, pound foolish.”

Chronic care management not independent episodes

Too many discussions of health care costs tend to think of health care consumers as patients who experience an illness episode and then get fixed. We get sick, go to the doctor, get cured or break a leg and have it fixed. Under that way of thinking health care costs are independent transactions. Cost management focuses on reducing transactional costs.

But the true cost drivers in health care are not the increased transactional costs of a series of independent episodes. The bulk of health care costs come from patients with chronic conditions that rather than being “cured” or fixed require regular care management over a long period of time, often the duration of the patient’s life.

The impact of chronic disease on health costs has been publicized by the Partnership to Fight Chronic Disease and much of the analysis of chronic care costs that follows is influenced by their work and the research of its executive director, Kenneth Thorpe of Emory University.

According to recent research, the bulk of health care spending and the lion’s share of the increased cost of health care comes from patients with chronic disease and the increases in those disorders.

According to the US Center for Disease Control, at least 75% of the cost of health care in the United States comes from chronically ill patients who need regular and ongoing case management.[13] A report from Johns Hopkins University estimated the cost closer to 80%.[14]

In addition, much of the increase in health care costs isn’t just more spending on an unchanging set of conditions, chronic or otherwise. In fact, most of the increase in health costs can be traced to increased cases of the conditions driving spending. A study by Kenneth Thorpe in the journal Health Affairs found “nearly two-thirds of the rise in health care spending is linked to a rise in treated disease prevalence (for example, diabetes) and innovations in medical treatment” for chronic conditions.[15]

For the largest taxpayer-funded health programs, the impact of chronic disease is even greater. According to the same Johns Hopkins study, chronic conditions account for 83% of the total spending in Medicaid and about 96% of the costs of Medicare.[16]

Kenneth Thorpe’s study of Medicare spending found that not only was almost all of Medicare spending related to people with multiple chronic illnesses but the entirety of the increase in Medicare spending was the result of the treatment of multiple conditions. “Virtually all of this spending growth is associated with patientswho are under medical management for five or more conditions.This is traced to both a rise in true disease prevalence andchanges in clinical treatment thresholds.” Further, total spending is influenced not just by people with one condition requiring care management but by multiple conditions: “in 2002, 92.9 percent of health care spending was incurred by beneficiaries with three or more conditions during the year.”[17]

 

Why Does Chronic Care Matter?

It matters whether spending is the result of chronic conditions or episodic care because of the difference in treatment and expense. A “chronic disease” is an ongoing condition like asthma or diabetes which rather than being cured is managed to keep complications from being too expensive and too incapacitating. A broken leg is an event that happens, is fixed, and goes away. Chronic disease is a condition that requires ongoing care.

Asthma is one of the less expensive examples. Someone with asthma can be treated on a regular basis with antihistamines and a prescription inhaler to manage the symptoms that lead to more serious problems. Managing the illness with less expensive prescriptions allows a patient to avoid a visit to the emergency room that costs him time and trauma and costs the insurance company of public provider much more money.[18]

Another example is New Hampshire’s experience with mental health prescription drug limitations outlined above. The state didn’t save money because the spending was for an ongoing illness. After the prescription spending cap was repealed, spending on both prescriptions and mental health clinics reverted to previous levels. Because the condition was being managed, the payer, in this case state taxpayers, spent a little more on prescriptions but saved 17 times as much on the more expensive emergency care.

 

Obesity

Although costs are rising, are there really savings to be found? To begin with, any improvement with individual patients with asthma add up bit by bit. But there are clear examples of some conditions and areas where larger savings could be found.

The Thorpe and Howard analysis of trends in Medicare spending tried to isolate some trends and found one. “What accounts for these trends? Clearly, increases in obesity levels play a role. Many obese people have multiple morbidities such as hyperlipidemia, diabetes and hypertension.” For the period studied, 1987-2002, the share of patients with obesity more than doubled.[19] What’s more, the share of total Medicare spending by obese patients increased from 9.4% to 25%.

It would be unrealistic to make projections about eliminating human nature and thinking that no one would ever be obese but a more realistic improvement might also save money. Many studies have attributed being overweight to health costs like a greater risk of diabetes and greater health care spending. A study by Thorpe and Howard and two other colleagues found that health spending on obese Americans accounted for almost one-third of the increase in health care spending from 1987-2001, finding that health care costs were 37% greater among the obese than among “normal weight” patients.[20]

We know that some portion of the population will always be obese so the increased spending level matters only if there is a realistic chance to lower that percentage and if it would affect spending. In fact, Thorpe has looked at precisely that question. The obesity study decomposed spending growth to determine spending levels if obesity rates – and the chronic conditions associated with those increased rates – had remained unchanged at their 1987 levels.

According to the authors’ calculations, obesity accounted for almost 30% of the overall increases in total health care spending from 1987-2001. While all 30% of that increase could not have been avoided, had obesity levels remained at their 1987 levels, overall health spending would have been about 10% less, a potential savings of almost $200 billion.[21] The equivalent savings in the state of New Hampshire would be about $700 million.

The size of potential savings from reducing obesity levels to those of the not-distant past helps explain the recent focus on weight-loss efforts. For example, in New Hampshire, Dr. Susan Lynch, the wife of the current governor has focused most of the public affairs effort of her position on childhood obesity.

 

Trend-setting by Medicare

Medicare, the government’s health care program that covers everyone over 65, has traditionally been a bastion of old episodic care thinking about health care. The cost-drivers in Medicare are patients with multiple conditions who seek care from a variety of providers working on a fee for service cost structure. The result is a system that doesn’t promote efficient care or serve the needs of the patients. According to the Institute of Medicine of the National Academy of Sciences, “the system provides few disincentives for overuse of often high-cost and does little to encourage coordinated, preventive, and primary care that could save money and produce better health outcomes.”[22] The IOM’s critique might just as well have been of the entire health care system.

The Medicaid Payment Advisory Commission found that patients aren’t getting the care needed for their condition largely because the structure of the system doesn’t support care management: “care coordination is more difficult to do in the fee for service program because it requires managing patients across settings and over time, neither of which is supported by the current payment methods or organizational structures.”[23]

Dr. Mark McClellan served as director of the Center for Medicare and Medicaid Services and helped bring Medicare into the 21st century by beginning a program to move toward a modern vision of health care. He helped create the Medicare Advantage program. “Increasingly, efficient healthcare is about prevention, personalization and coordination of service around the needs of an individual patient.”

To begin to move toward disease management, the new program was created as a voluntary option. The Medicare Advantage programs are administered by private providers and include more case management, patient education for self-care and disease management.

According to McClellan, the disease management approach is the beginning of a needed transformation in healthcare, especially in taxpayer funded plans: “If our nation is to close the huge gap in prevention and in quality of care for chronic diseases, it is essential that we promote access to coverage like that available in most MA plans, which emphasize preventing illness in the first place, avoiding preventable complications of chronic diseases, and using health care more efficiently.”[24]

Ultimately, health care costs will be addressed by multiple providers competing with each to provide better care and better quality of life for patients while reducing their total health care costs over a long period of time rather than responding to expensive emergencies.

The rapid rise in insurance costs had led both insurers and business providers of insurance to look for ways to save money not just through cost-sharing but by creating incentives for a healthier lifestyle.

 

New Hampshire Action

The State of New Hampshire has not been as helpful as it might be in this respect. The most recent health insurance “reform” in the small group market had at its center eliminating the ability to consider health factors in insurance. Proponents of such reform were concerned about the ability to adjust rates for health conditions but allowed significant variations for age. Previously health factors could create differences of up to 25% in premium. As a proxy, age variances of up to 350% are now allowed. Because of the reform, non-smokers may not be charged lower rates nor may the insurance premium be lowered for any other healthy lifestyle choice.

Despite that limitation on building incentives into premiums, companies are still working to promote care management and create incentives for improved health to decrease costs.

Consumer-driven health care plans. Recent innovations in plan design attempt to make the health care consumer both cost conscious and health conscious by making him a partner in sharing savings and controlling costs. National evidence suggests this approach has the potential to lower costs but only recently has there been any New Hampshire experience to judge. Cigna, the state’s second largest insurance company, studied a year of claims for 38,200 enrollees in their consumer-driven insurance plans and found costs were 16 percent lower and use of medications for chronic conditions had increased.[25]

Care Management. Insurance companies can determine which of its members receive some care for chronic conditions and are now reaching out to consumers to manage that condition. If a customer with asthma manages his treatment to avoid high cost emergencies, it improves his health, reduces health costs and saves the insurance company money as well.

Financial Incentives and Penalties. Larger employers aren’t affected by the state small business regulation and rewards for a healthier lifestyle are becoming more common.

  • A southern New Hampshire employer offers rewards for healthy choices that improve the employee’s health and saves the company money. Non-smokers, regular exercise, or routine physical are all rewarded with cash payments. In addition, the company pays for free gym memberships.[26]
  • Twenty years ago, when state employees had multiple health insurance choices, the insurance companies competed annually to earn business. One choice was free health club membership, continued so long as an employee made a certain number of visits.
  • One company adds surcharges of $15-$75 each month based on body-mass index. Employees who improve their weight and health earn rebates. Others offer rebates to employees who complete health risk assessments and offer financial incentives to act upon the findings.[27]

A combination of incentives and penalties turn the employee into a partner in lowering health costs and keeping insurance affordable. Both the employee and the company have an incentive to reduce costs and improve health and both share the financial results.

 

Conclusion

The cost of health is growing much more rapidly than wages, the economy, and the ability of governments to afford it. We have no choice but to work to reduce the cost of health care for individuals, for companies and for governments. But the true drivers of spending demand we change our thinking about health care from the transactional cost independent episodes to ongoing care management and avoided costs.

About 75% of the total cost of health care and 96% of Medicare comes from patients with chronic conditions who require ongoing management of their care but often don’t receive it. Most of the increased health care costs over the last twenty years come from increased prevalence of chronic conditions, many of which can be controlled like obesity.

The potential to save billions and significantly slow the increase in health costs and therefore insurance premiums comes, in Mark McClellan’s words from “preventing illness in the first place, avoiding preventable complications of chronic diseases, and using health care more efficiently.”

Nothing in changing our paradigm in favor of chronic care management demands we accept or reject other reforms, prefers the agenda of one political party over another, or demands that the effort be carried forth solely by the government or solely by the private sector.

On the contrary, there are dozens of initiatives that can dovetail nicely with a focus on chronic care management. Some of them, like Medicare Advantage, may be government initiatives. Others may take the shape of business and insurance company initiatives to promote health among employees.

What is certain is that there is no one magic solution to health costs. We spend a lot of money as a society on perhaps the best health care system in the world. A less desirable way to reduce those costs is to ration care by one system or another. A better solution will focus on a growth strategy to improve health and eliminate complications by managing the chronic conditions and health risks that drive almost all the system costs.


[1] The data is taken from the U.S. Department of Health and Human Services Agency for Healthcare Research and Quality (AHRQ) at http://www.meps.ahrq.gov/mepsweb/. The Medical Expenditure Panel Survey (MEPS) is published annually although state specific data for New Hampshire was not compiled annually until 2002. New Hampshire’s average premiums have been about 10% higher than the national average for the last decade.

[2] The National Conference of State Legislatures annually compiles the cost of state employee health benefits. The NCSL uses family coverage and there are some slight variations with state sources. Their table is used a consistent standard to compare one state to another and generate a comparative national average. NCSL: State Employee Health Benefits, 2007 edition

http://www.ncsl.org/programs/health/stateemploy.htm.

[3] The total cost of state employee health coverage is 86% higher. The discrepancy to state budgets is even worse. Most states pay only a portion of the premium cost reducing the state obligation to about $9800, less than half the cost to the state in New Hampshire.

[4] The numbers are calculated from The Kaiser Family Foundation and Health Research Educational Trust, Employer health benefits 2006 Annual Survey, p. 19. http://www.kff.org/insurance/7527/upload/7527.pdf.

[5] The national health statistics include “total national health expenditures.” The category “personal health care” is a subset that does not include capital investment, research, public health or plan administration. In some ways the broader category is better because it includes other components that drive insurance costs. The narrower category may be a more direct measure of health and its costs but the two have very similar rates of increase. The state level statistics are maintained by personal health care expenses.

[6] See US Department of Health and Human Services Centers for Medicare and Medicaid Services National Health Expenditure Accounts

http://www.cms.hhs.gov/NationalHealthExpendData/downloads/nhestatesummary2004.pdf

[7] Although the trends are useful, the state specific data represents spending not by residents of New Hampshire but rather spending inside the borders of New Hampshire by whomever. So, a resident of New Hampshire served at a Boston hospital shows up as Massachusetts spending while a Vermonter going to a New Hampshire hospital counts toward the New Hampshire total.

[8]New Hampshire’s spending growth has declined in each five year period of the 20 years mentioned. From 1984-89, growth was 14.5% annually; 89-94 was 8.5%, 94-99 7.65% and 99-2004 was 7.57%.

[9] Author’s calculation assumes a growth rate of 7%, just slightly higher than the national projected 6.92%.

[10] Brian Gottlob, Polecon Research, “Demographic Myths and Realities, Challenges and Opportunities in New Hampshire,” presentation to the Stratford Regional Planning Commission, 31 May 2007, p. 13.

[11] A useful compilation of all the National Health Expenditure Accounts data for New Hampshire and a comparison to the state’s economy is contained in Doug Hall, “16 cents of Every Dollar: Health Care Costs in New Hampshire (2004-2005),” The New Hampshire Center for Public Policy Studies, March 2007. http://www.nhpolicy.org/16centsperDollar2007.pdf.

[12] Soumeria, S.B., McLaughlin, T., J., Ross-Degnan, D., Casteris, C.S., and Bollini, P. “Effects of Limiting Medicaid Drug-Reimbursement Benefits on the Use of Psychotropic Agents and Acute Mental health Services By Patients with Schizophrenia.” New England Journal of Medicine, 331: 650-655; 1994.

[13] The U.S. Centers for Disease Control and Prevention has an overview of chronic disease statistics available on its website at http://www.cdc.gov/nccdphp/overview.htm.

[14] “Chronic Conditions: Making the Case for Ongoing Care” September 2004. The Partnership for Solutions. http://www.rwjf.org/files/research/Chronic%20Conditions%20Chartbook%209-2004.ppt.

[15] See Kenneth E. Thorpe, “The Rise in Health Care Spending and What to Do About It, “ Health Affairs, November/December 2005.

[16] Gerard Anderson, “Chronic Conditions: Making the Case for Ongoing Care,” page 19. Partnership for Solutions, Johns Hopkins University, September 2004. The presentation is an update of a 1996 study by Catherine Hoffman and Dorothy Rice, “Chronic Care in America: A 21st Century Challenge.” http://www.partnershipforsolutions.org/DMS/files/chronicbook2004.pdf.

[17] Kenneth E. Thorpe and David H. Howard, “The Rise in Spending Among Medicare Beneficiaries: The Role of Chronic Disease Prevalence and Changes in Treatment Intensity.” Health Affairs, Web Exclusive, 2006. http://content.healthaffairs.org/cgi/content/abstract/25/5/w378.

[18] The scenario outlined is based on the author’s recent experience with his own asthma condition, management plan, and emergency room episode.

[19] Obesity levels are calculated using the body-mass index (BMI). BMI is calculated as weight in kilograms divided by the square of height in meters. Normal weight is defined as a BMI from 18.5 to 24.9, 25 is “overweight” and 30 is “obese.”

[20] Kenneth E. Thorpe, Curtis S. Florence, David H. Howard, and Peter Joski, “The Impact of Obesity on Rising Health Care Spending,” Health Affairs, web exclusive, 2004. http://content.healthaffairs.org/cgi/content/full/hlthaff.w4.480/DCI.

[21] For a more basic and less academic explanation of potential cost savings, see Kenneth Thorpe’s short piece “Potential Savings Under the AdvaMed Plan Associated with Health Reforms Focusing on Chronic Care Management, Prevention, and Health Information Technology,” 14 June 2007, p.1-2. http://www.

[22] The Institute of Medicine, “Rewarding Provider Performance: Aligning Incentives in Medicare,” September, 2006. http://www.iom.edu/CMS/3809/19805/37232.aspx.

[23] Medicare Payment Advisory Commission, “Medicare Advantage Benchmarks and Payments Compared with Average Medicare Fee for Service Spending,” June 2006. http://www.medpac.gov/document_TOC.cfm?id=421.

[24] Mark McClellan, “Testimony on Medicare Advantage and the Federal Budget,” June 28, 2007. http://www.aei.org/publications/filter.all,pubID.26413/pub_detail.asp.

[25] see Kathi Ragsdale, “Prescription for Savings,” Business NH Magazine, September 2007.

[26] Kathi Ragsdale, “Prescription for Savings,” Business NH Magazine, September 2007.

[27] Lisa Cornwall, “Companies Linking Benefit Charges to Health Risks,” Associated Press, 17 September 2007 http://www.burlingtonfreepress.com/apps/pbcs.dll/article?AID=/20070917/BUSINESS/709170309/1003

Over the last year, states from coast to coast have considered the policy implications of importing prescription drugs from Internet pharmacies in Canada. Proposals have faced opposition from state pharmacists, every major Canadian pharmacist organization, and a concise condemnation from the Canadian Medical Association: “We feel Internet pharmacies could jeopardize patient safety and we’re against them.”