Whereas some degree of healthcare reform seems likely to be enacted, what is shaping up as "reform" will likely be a failure in terms of "serious cost containment," according to Paul B. Ginsburg, PhD, president of the Center for Studying Health System Change, Washington, DC, a think tank that analyzes changes in financing and the delivery of healthcare.

Based on his broad experience in the field of healthcare economics and policy, Ginsburg delivered an invited lecture on cost and reform.

Simply put, there is no single or simple solution, Ginsburg said. "A single approach to containing costs is unlikely to be sufficiently successful," he predicted. "We need to pursue many distinct but consistent approaches to offset the risk that some approaches will not succeed."

Need to contain costs
On the national level, rising costs are undermining the mechanisms that finance healthcare and are a key factor in the country's "dire public fiscal outlook," he noted. On the individual level, private insurance is increasingly unaffordable, and the affordability problem now affects the middle class, Ginsburg said.

The cost of Medicare, Medicaid, and tax expenditures for private health insurance are all growing faster than the gross domestic product (GDP), and the result is that other priorities are neglected, taxes are higher, and the deficit is growing.

An international comparison provides evidence of undue healthcare costs in the United States. Although healthcare accounts for 16% of the GDP in this country, for a number of other countries it is around 11%.

"Adjusting for income, the United States spends an extra $477 billion per year on healthcare," he noted.

Evidence of rising costs comes from a comparison of cost trends with income trends. "There has been a 37% increase in earnings to support a 120% increase in premiums," he said. "This gap explains three fourths of the long-term decline in the percent of the insured population."

What's driving up costs?
The key drivers of rising costs are higher incomes (more money is available to spend on healthcare), developments in medical technology, less healthy lifestyles, small gains in productivity related to the delivery of health services, new patterns of competition in healthcare, and, to a lesser degree than most assume, the aging of the population. Aging contributes just one half of one percent or less to the spending trend each year, according to Ginsburg.

Additional drivers include the poorly functioning medical liability system and state insurance mandates.

At least one third of the trend in spending stems from technological "advances." New treatments are more effective—yielding better outcomes with lower risks—but the tendency is to overuse them to the point of limited or negative gains, he pointed out. Marginally effective, ineffective, or harmful treatments also add to rising costs, and little funding is available for effectiveness research to weed these out. Unhealthy lifestyles create more health problems. Obesity alone is estimated to account for 12% of the spending growth in recent years. Declines in smoking have held down cost trends but still contribute, he said.

Although the prosperity of the economy largely derives from gains in productivity, this is true only for certain industries, such as banking and airlines. "There is much less productivity in healthcare," he noted.

One reason is the lack of the proper incentives for healthcare providers. Few incentives exist to produce episodes of treatment or to help improve a patient's health more efficiently, he noted. And efficiency of the care delivered varies widely.

The term new patterns of competition refers to the "more entrepreneurial delivery system" of today, that is, the expansion of profitable services that may not add true value. Medicare and private insurers have failed to set payment rates to appropriately reflect relative cost of services; this has led hospitals to expand services that are profitable, such as cardiac procedures, and to open special facilities, such as "heart hospitals." It is possible, he continued, that expansions of capacity are actually creating a demand for services.

Tied to this is an increase in physician self-referrals, such as more referrals for magnetic resonance imaging when a physician owns an imaging center. "With ownership of facilities, the scope of physician self-referral is wider, and this is worrisome to me," he told the audience.

Why are costs so hard to contain?
Cost containment is complex and, for various reasons, is viewed by many sectors as threatening. "All spending pertains to someone's income, and there is an increasingly effective lobby to protect incomes," Ginsburg observed.

  The country's political leaders are also "falling down on the job" by fostering the notion that costs can be contained without sacrifice, he added. "The concept of 'cutting waste, fraud, and abuse' goes way back," he said. "Politicians claim there will be large savings through reducing waste. It's a terrific idea, but it won't solve the cost problem."

It is highly uncertain that such "painless solutions" will contain costs, he main tained. The other current proposals include the promotion of quality reporting and payment for quality, the advancement and adoption of health information technology, and application of comparative effectiveness research.

The "red herrings" of healthcare reform and cost containment
The motivator of health reform is the expansion of insurance coverage; however, coverage expansion will exacerbate, not alleviate, the cost problem, according to Ginsburg.

"Uninsured people spend less," he pointed out. "More comprehensive insurance leads to higher spending—bringing the uninsured up to insured status will increase healthcare spending."

  The public plan option is also faulty, he said. "Only the 'robust' version can impact costs through lower provider payment rates," he noted. "The version in the bill has little potential to reduce costs." He said increased competition in insurance markets has limited potential.

Cost-savings through increased wellness and prevention is another fallacy, he added. "The evidence on the lack of potential for savings is very strong. Many in Congress are unwilling to accept the evidence, but the Congress ional Budget Office analysis found that prevention will not reduce federal outlays."

Which approaches may work?
A single approach will not be the sole solution to cost containment, and most of the strategies being discussed have advantages and disadvantages.

Increased patient cost-sharing (benefits "buy-downs," consumer-directed health plans, and health savings accounts) is part of a demand-side approach to cost containment, and it is not favored by political liberals. In fact, patient cost-sharing does a fairly poor job of addressing spending trends, Ginsburg added, because most spending is concentrated within a relatively small population of patients. "The burden of healthcare falls more on the sick and the poor," he observed.

However, patient financial incentives "clearly work," he continued, but will not accomplish much because healthcare use is not particularly sensitive to patient incentives. Certainly, to be effective, the "tools" for patient incentives need refinement, he said.

One proposal is a "value-based benefits design," which will vary cost-sharing by service type and patient condition—with low barriers to the management of chronic disease and higher barriers for elective services. This approach would promote the choice of more efficient providers, because consumers would reap savings when they choose less costly providers and less efficient providers would have incentives to improve. Another "tool" is the excise tax on the so-called "Cadillac plans."

Also part of the demand-side approach is greater research on price and quality, which in theory is favored by all except providers, but in practice may be less useful because its impact will not be felt for years. The government's role would be in data gathering rather than price setting, which would fall to insurers to customize and simplify.

In addition, some believe that programs aimed at wellness and health promotion will help contain costs, but the effect of prevention is unproven, he reiterated.

More accurate payment structure proposed
As a supply-side approach, the crafting of a more accurate payment structure is widely proposed, based on the unintended wide variation in profitability by service. Medicare is well positioned to make structures more accurate (and private insurers and Medicaid programs will follow), but Medicare needs to apply more political and financial resources to this, which is problematic because many hold a negative view of Medicare governance, he added.

The supply-side approach also includes broader payment units (BPUs) as a means of reducing the role of fee-forservice, which is faulted by having incentives for service volume and lacking motivations or rewards for coordinated services. BPUs introduce elements of capitation in the form of accountable care organizations. The strategy can incorporate episode-based payments, in which actual per-episode payments can be made to a joint entity or by fee-for-service with incentives for all involved.

But Ginsburg questioned whether BPUs will be developed and implemented and whether the idea will succeed. "BPUs have opportunities for physicians—rewards for reducing spending on hospital care, pharmaceuticals, and devices. They can save money by reducing hospitalizations, choice of drugs, and so forth and not just by reducing the physician's own services. They can capture rewards from this," he said.

Finally, he concluded, the search for a solution is geared toward "pragmatism that recognizes the need to build on present institutions." Although debate once focused on "competition versus regulation," he pointed out that the country proved unwilling to embrace either of these approaches.