What would it take to bring health care costs under control?

What would it take to bring health care costs under control?

Kaiser Family Foundation has released an analysis of health care expenditure growth. The “snapshot” report identifies a variety of approaches that are being implemented or proposed to reduce costs or reduce the rate of growth. These comprise the usual suspects: health care IT, disease management, predictive modeling, wellness programs, pay for performance, payment rate reductions, cost-sharing, consumer directed plans, limitations on medical malpractice awards. But despite all these initiatives, the news isn’t good:

Although many of these efforts may lead to efficiency and quality gains, none would appear to be of a scale to have any meaningful impact on the overall cost picture.

So what would it take if we were serious about cost reduction? The report doesn’t offer any ideas, but here are some of mine. (Note, that I don’t necessarily advocate these measures. I’m just pointing out what it would take.)

  • Restricting the number of health care providers and facilities
  • Reference pricing for pharmaceuticals
  • Sending patients offshore for treatment
  • An explicit decision not to pay for everything
  • Biogenerics
  • A single payer system

Considering the paucity of support for these measures, don’t expect the health care expenditure curve to flatten out any time soon.

May 3, 2006

5 thoughts on “What would it take to bring health care costs under control?”

  1. It is hard to dismiss “pay for performance” based on anything in the Kaiser report. If both physicians and patients benefit financially from reducing unnecessary spending we can get real progress on getting medicine more lean and efficient.

    It is important to dilute the cost-cutting incentives enough so institutions take on the cost-cutting to some degree collectivley in order to stimulate group learning and discourage improper cost-cutting.

    To transition from an environment in which there are no incentives for doctors to avoid ordering extra tests it is best to give doctors, hospitals and patients incentives to save money.

  2. Wouldn’t restricting the number of providers concentrate market power and lead to higher rates at least in the short term? I’d say that’s an awful idea. Let the market sort that one out via incentives to lower utilization and let providers close naturally, due to basic supply and demand, resulting in lower equilibrium rates in the long term.

    (Take a Laffer curve, but revenue on the Y, price on the X, and let lower utilization shift the entire curve leftwards over time).

  3. In most businesses restricting supply would cause an increase in prices, as MAtt suggests, but it doesn’t seem to work that way in health care. For example, having more MRIs or more doctors just seems to lead to greater use of services. Medicare rates are simply dictated and for most docs that’s the way it is with commercial insurance, too.

  4. So, assuming fixed rates (small percentage-payment-rate exposure), you can simply dicard the Laffer-shaped curve, insert a cap, and no (or little) additional scarcity occurs? How far can one restrict supply?

    And about the market power issue; commerical insurance follows a contracting cycle, as do privately adminsitered Medicare programs that CMS farms out to insurance companies. If you reduce the number of providers and market power concentrates, wouldn’t that lead to higher fixed rates when contracts are re-negotiated (after the old ones expire)?

  5. Realistically, the way to restrict supply would be to not fund the expansion in medical school slots that advocate such as Cooper propose. As Garber points out(http://www.annals.org/cgi/reprint/141/9/732.pdf), there isn’t really evidence of a shortage of physicians, and by licensing more providers we drive up costs. The effects are likely to be slow to be seen because supply won’t be restricted dramatically.

    My view is that physician bargaining power is driven more by how physicians organize (e.g., into large groups or unified IPAs) rather than their sheer numbers.

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