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Phone: (585) 412-6895 Email
Address: 165 Saxton Lane, Canandaigua, NY 14424, USA
Below are articles related to health care costs posted in order of original posting from most recent to earliest:
By Jeff Adams, June 12, 2013
The rapid increase in health care costs continues to be problematic in the United States for employers, individuals, and the government. For decades employers have been, and continue to, drop coverage for employees due to the high cost of care. Individuals in many states have been unable to purchase coverage due to its high cost, especially after years of the adverse selection spiral. Costs for healthy individuals in some states have been more affordable due to medical underwriting. But this will no longer be the case due to health care reform, as the Affordable Care Act endeavors to make health care more affordable for individuals who have higher health care costs. Individual coverage for lower-income persons will be subsidized and more affordable in the short term. However, this subsidy will fade after a few years making health care coverage, once again, unaffordable for those with low income.
Government health care costs (including Medicare, Medicare, and Children’s Health Insurance Program) are increasing rapidly as a percent of the federal and state budgets. Health care is now around 24% of the Federal budget. Each year this percent increases, meaning that funding for other programs or funding for states will need to decrease. It is possible that in 20 years or so health care costs will be 50% of the Federal budget if costs continue to grow at the current rate of increase.
As a result of these cost issues and quality of care issues, the Affordable Care Act (“ACA”) created the Innovation Center within the Centers for Medicare and Medicaid (“CMS”). This Innovation Center was designed to encourage new ideas by providing grants for the development of models that increase quality of care without increasing costs or that decrease costs without decreasing quality of care. Once these models prove successful, it is hoped that the successful models will be duplicated to increase quality of care and decrease costs in both government-sponsored and commercial health care.
As part of the approval process for a grant, CMS must get a certification from its Chief Actuary regarding the cost impact of the proposed model. An application to obtain a grant from the Innovation Center should contain specific financial impacts that are well laid out and supportable. This is often difficult due to the fact that these models may be entirely new, and no historical studies may be available. The grant application must be reviewed by an actuary so that the actuary can comment on the reasonableness of the assumptions in the application.
More information about the process may be obtained by going to the Innovation Center website:
Feel free to contact me if you need actuarial assistance for your grant application.
By Jeff Adams, January 7, 2013
If health care costs continue to increase at their current pace, they have the potential to bankrupt Federal and state governments. Employers will continue to drop coverage for employees as costs to cover employees increase faster than corporate revenues. Policyholders who are purchasing coverage through direct pay policies will eventually not be able to afford coverage. Even policyholders qualifying for the Premium Tax Subsidy through the new Exchanges under ACA will not be able to afford coverage as they will have to pay substantially more for coverage as premium increases far exceed the Consumer Price Index (“CPI”) increases on which future government subsidies will be based.
Health care currently represents approximately 17% of our economy. This means that care needs to be taken to prevent not only significant future health care cost increases, as described above, but to prevent large decreases in health care spending, which would possibly send our economy into another recession. For example, if health care costs were to decrease by 10% from 2013 to 2014, that would be an impact on the overall economy of -1.7% or a 1.7% reduction in the economy due to the health care cost decrease. If the rest of the economy grew at 2% during that same period, the overall economy would grow at roughly 0%. Instead of substantial decreases in health care costs, controls that would limit future health care cost increases to between 0% and the overall CPI increase would be the preferred method to proceed.
No other nation has health care costs at 13% or above, compared to the 17% in the US. In spite of this, the United States ranks low in overall health care quality of care by most independent, objective studies.
Studies show some of the reasons for the high costs in the US. Various studies show that 25% to 30% of all health care costs are fraud, waste, and abuse. Other studies show that 10% of all hospital claims result from abuse and misuse of prescription drugs. A final study indicates that 20% of health care costs in the United States are a result of the majority of the population is either overweight or obese. Even if we only reduced half of the above, we would decrease costs by 30%, excluding cross-correlation of the factor impacts. This would reduce the health care costs from 17% of the economy down to slightly greater than 12% of the economy, similar to several other countries. Obviously, there are many issues in our health care system in addition to those stated above, and additional savings can be obtained. There is no “silver bullet,” and looking for THE silver bullet causes substantial harm to the process of fixing our health care system. The solution will be a combination of many different fixes, which will combine to make our health care system efficient but with a higher quality of care.
Described below are several ideas for reducing costs while maintaining or increasing quality of care. These are not intended to be the end-all solutions, just some sample ideas. Comments and suggestions are welcome, as always.
Eliminating the entire 30% of health care costs that are estimated to be fraud, waste, and abuse is probably not possible, but much of it can be cut out. Combination quality of care and efficiency incentive programs such as the Accountable Care Organizations (“ACOs”) created by health care reform could reduce costs by 5% for those providers in ACOs. Much-talked-about malpractice reform could cut an additional 1% from health care costs. Comparative treatment research such as that contained in health care reform and standardized treatment protocol could eliminate more waste and 5% of health care costs by redirecting services to more efficient venues. For example, a patient could be directed to extensive physical therapy instead of higher cost and lower quality of care surgery. Also, treatment could include education on better diet and exercise habits instead of prescribing drugs for Type 2 Diabetes or instead of bariatric surgery. Staff model HMOs are more efficient than fee-for-service payors and would show significant efficiencies but must be accompanied by strong quality of care programs. The issue of too few primary care physicians and too many specialists needs to be addressed as it causes overutilization of specialist services and also causes excess services due to a lack of coordination of care for the individual’s treatment plan.
Of the 30% fraud, waste, and abuse, prescription drug usage is a significant problem. In this era of the “Rx Generation,” a study has shown that 50% of all drugs that are prescribed are not necessary. Many attempts have been (and will continue to be) made at lessening prescription drug fraud and abuse, and no additional comments will be made on that aspect here. Additionally, however, overprescribing drugs is a huge problem. Reducing overprescribing rates will require cooperation between various parties such as patients, physicians, pharmacies, pharmaceutical companies, governments, and others. As an example, studies have shown that patients see drug advertisements on television, decide they “need” that particular drug, go to their physician, and demand the drug. The physician is faced with the dilemma of giving the patient his or her desired drug, even if it is not the best treatment, or losing that patient, and the corresponding income, to the physician down the street who will prescribe the drug. This is a difficult situation with no easy solution. One possible solution is to ban drug commercials from television under the premise that patients should be learning treatment options from the physicians and Internet instead of from possibly misleading commercials produced by the pharmaceuticals themselves. Another method of reducing unnecessary prescription drug usage is to limit the money that pharmaceuticals pour into “advertising” in its many forms, including money used to pay for educational seminars for young physicians and direct or indirect gifts to physicians.
A further complication that arises out of prescription drug overuse is the cost of dealing with the side effects of the drugs. Most drugs have side effects, some of which can be problematic. At least one study has shown that 10% of all hospital costs are due to abuse and misuse of prescription drugs. So to the extent we reduce the abuse and misuse of prescription drugs, we reduce this 10% of hospital costs.
We may never be able to completely eliminate the 20% of our health care costs that are due to the increasing portion of our population that is overweight and obese. We may not even be able to decrease this percent for a few years, but we need to at least stop the increase soon. The obesity problem will also be difficult to overcome due to the underlying behavioral modifications necessary and the delicacy of the topic. People in the US tend not to eat the correct foods or do not get enough exercise, resulting in a much higher obesity rate than in other countries. Studies have shown that physicians are uncomfortable broaching the subject with their patients for fear of angering them and losing the patient and corresponding income to the physician down the street. People want to take the easy way out, including taking medicine, having surgery, or just dealing with the consequences of being overweight. Since there are currently no real incentives to correct this situation, this problem will increase with time. One solution could be a form of benefit plan that gives increased benefits to those who are not overweight or who are overweight but in a weight loss or nutrition program. I will leave it to more intelligent people to determine the best weight levels to use and what exceptions to allow.
The current fee-for-service payment structure in our health care system may not be the optimal system as it encourages providers to increase utilization of services in order to increase revenues. Much research is being done to determine other payment models that do a better job at combining quality of care and efficiency. Having said that, our fee-for-service payment method will probably be here for some years to come, at least in some form. In addition to possible incentives for providers to increase utilization to increase revenue, the current fee-for-service payment rate negotiations between physician groups, hospitals, or other vendors and insurance companies, HMOs, or health insurance funds are sometimes problematic. A physician group, hospital, or another vendor may have a “monopoly” on services in a given area, causing the insurer, HMO, or health insurance fund to have no leverage in contract negotiation, resulting in excessive payment rates. There are also situations where cuts to Medicare and Medicaid would cause physicians, hospitals, and vendors to seek higher payment rates from the commercial insurers and HMOs. A possible solution to these problems is to cap the payments to physicians, hospitals, and other vendors at the Medicare payment rate for all lines of business. There would be a transition period so that fees would not actually decrease from one year to the next due to the cap.
Other good suggestions that I have heard include health coaching, wellness programs, population management and behavior modification, enhanced use of non-physicians, and use of telemedicine.
Part of the excess in health care costs is due to administrative costs either at the place of treatment or at the HMO or insurer. Standardization and automation of the process could reduce administrative costs and thus reduce overall health care costs by a percent or two. Many insurers and HMOs are not-for-profit, meaning that they are not in the business of making money other than the profit required by state law. There are also For-Profit HMOs and insurers that intend to make profits. Although I am not keen on these entities making a profit on health care, I do believe that the premiums for these For-Profits are actually generally less than the not-for-profit entities due to increased efficiencies. So I am not overly concerned about mandating decreased profits for these entities, although I am not against it either.
These are just some of my thoughts on changes in our health care system that might lead to more efficient health care along with a higher quality of care. I welcome any and all comments and suggestions on the topic.