A review of health care costs: deck chairs and the Titanic, part 2

https://stateofreform.com/news/federal/2019/02/breaking-down-health-cares-cost-dilemma-part-ii/

Related image

This article is Part II of a two-part series on the cost of health care and its component parts. Part I explores the recent growth of health care costs in the United States as well as the utilization inputs in the cost equation. Part II breaks down the pricing component of cost, determined by market leverage and the cost of delivering services. 


The Titanic

This brings us to the second category of costs: the Titanic. Or, to use our equation here of THC = U x P, the Titanic I’m talking about is the pricing component of cost.

In other words, health care leaders should do everything they can to make sure that utilization is the right care at the right time in the right setting. This makes a meaningful difference in the quality of our health care system.

But, if we focus on health care utilization alone, the health care system is still going to sink under the weight of costs. Our efforts will still be deck chairs on the Titanic.

To keep our ship afloat, we have to address the pricing input of our cost equation.

Like our cost equation above, pricing also has a simple equation of two inputs that determine price. According to a seminal study out of Massachusetts, which has been reaffirmed in additional studies (and by the experience of many network relations vice presidents across America’s health plans), this equation is straightforward.

Pricing is determined by a combination of market leverage (ML) and service delivery costs (SDC), where market leverage is 75 percent of the pricing structure and the cost of delivering the service is 25 percent.

This is true for either the plan or the provider, depending on where market leverage exists. This equation looks like this: P = ML(.75) + SDC(.25).

If we put this together, the math equation would look like this: THC = U x (ML(.75) + SDC(.25)).

Here’s how the study put it:

Price variations are correlated to market leverage as measured by the relative market position of the hospital or provider group compared with other hospitals or provider groups within a geographic region or within a group of academic medical centers. 

While addressing the utilization component of the cost-growth problem is essential, any successful reform initiative must take into account the significant role of unit price in driving costs. Bending the cost curve will require tackling the growth in price and the market dynamics that perpetuate price inflation and lead to irrational price disparities.

But here is what the numbers say: between 2004 and 2017, adjusting for age and sex factors, 68 percent of the growth in overall national health care expenditures came from increases in medical prices. Only 32 percent of growth came from utilization of services.

In other words, pricing is more than twice as important as utilization in the growth of health care costs – costs that are increasing more rapidly than ever.

 

 

Put graphically, while we have two inputs into total health care costs or expenditures, it’s incorrect to think of them as weighted equally, as demonstrated in image 1 above. It’s more accurate to think of these two pieces weighted as shown in image 2. And, if we are honest about the role of market leverage in health care pricing, market leverage alone is more than half of the overall problem in health care costs – more than all of the service delivery costs and utilization combined.

 

Keeping the Titanic afloat

Let’s restate the challenge we face here in our trans-Atlantic metaphor. Cost is the biggest problem in health care today. Those costs are made up by pricing and utilization, where pricing is more than twice as impactful in cost growth as utilization, and where market leverage is three times more impactful to pricing than are service delivery costs.

In order to keep our health care system afloat, we must address costs. And to address costs, we must address pricing.  And to address pricing, we must address market leverage.

If we move every deck chair around, but fail to address the cost consequences of market leverage, our ship will sink.

In our capitalist economy, we view consolidated market leverage as a market failure. It’s why we have antitrust statutes and an active regulatory regime to manage and push back against consolidation. Where the market failure is in the area of a public good, the American political system has often regulated those consolidated markets like public utilities or quasi-public entities.

Think of energy and Enron, of railroads and BNSF, of telephones and Ma Bell.

As health care nears 20 percent of the US economy, and where even urban states like California suffer from a “staggering” concentration of market leverage among health care providers, the lesson for health care policymakers and senior health care executives is this: If you want to get your hands around cost, you’re going to have to address market leverage to do that. Everything else is just deck chairs.

 

 

A review of health care costs: deck chairs and the Titanic, part 1

https://stateofreform.com/news/federal/2019/02/deck-chairs-and-the-titanic-part1/?utm_source=State+of+Reform&utm_campaign=ccf3275364-5+Things+CA+July+2_COPY_01&utm_medium=email&utm_term=0_37897a186e-ccf3275364-272256165

Related image

This article is Part I of a two-part series on the cost of health care and its component parts. Part I explores the recent growth of health care costs in the United States as well as the utilization inputs in the cost equation.

Part II will break down the pricing component of cost, determined by market leverage and the cost of delivering services. 


 

If you ask policymakers, industry leaders, and health care consumers, many will tell you that their number one concern with health care today is the cost.

For the most part, as a society we’ve moved past the days when access or quality were of primary concern to stakeholders. I would wager it’s not because those issues aren’t important.  Everyone knows we have wild challenges still with access and quality.

Rather, the acuity of the cost problem has risen so much, so quickly, that cost as an issue overshadows everything else.

This is a big topic, but it’s not really that hard to understand. Health care costs are actually a simple story.

There are only two categories of health care costs in America today. There are the deck chairs, and there is the Titanic.

Context matters, so let’s start there

Here’s one data point, but it’s largely the same point everywhere you look in health care.

These are average annual premiums for single and family coverage in the employer-based market. Those costs have doubled in the last 14 years, reflecting an average annual growth rate of roughly 5 percent since 2004.

 

 

Here’s another data point. According to CMS in an article in Health Affairs, “health care spending growth averaged 4.3 percent per year during 2008–17, compared to an average annual rate of 7.3 percent over the 1998–2007 period.” That might seem like costs are slowing, but it’s not the whole story.

Remember the “Great Recession?” It was the period of time when the economy almost fell apart. So, measuring health care spending growth should be done within some context of the overall economy.

For this, we can use a standard inflation calculator of the overall economy to compare its growth to the growth of health care costs. When viewed this way, health care inflation grew at a multiple of 2.7x the broader economy’s inflation rate between 1998-2007 and a multiple of 3.0x during 2008-2017.

So, not only are costs high in health care today, but they are growing faster than ever compared to overall inflation in the US economy.

 

Moving around the Titanic’s deck chairs

Let’s explore this metaphor a bit.

The Titanic is a big ship with a big deck. And so there are lots and lots of deck chairs to move around. And moving them around can cause authentic improvement to the quality of the experience.

A view out over the bow at a setting sun is a much better view than the one provided by a chair facing the steam funnel. Sometimes, chairs facing other chairs can foster comity and community through conversation. Sometimes, having alone time to ponder the stars in the night sky from the ship deck is nice.

How the chairs are deployed has a meaningful impact on the user’s experience of sailing on the Titanic.

I run with this analogy because there are a lot of things we do in health care today that meaningfully improve the experience, outcome and cost of health care.

You can probably name 10 such efforts without blinking an eye: improved care coordination, tele-health, community health workers, shared risk payment methods, integration of behavioral health, access to oral health, strong vaccination standards, online forums for shared patient experiences, good bedside manners, etc., etc.

All of these initiatives, as well as others, improve care and the user experience. They all can address cost in various ways, too. They can reduce hospital utilization, allow patients to access care remotely, reduce re-admissions or complications from drug interactions. There is a lot to like here that is meaningful and worth our time as a society to implement.

Put differently, in the cost equation where total health care cost equals utilization times prices (THC = U x P), I would categorize these initiatives as part of the utilization input of the cost equation. All of these initiatives address how we access and use health care in our system today.

But, at the end of the day, these are deck chairs.