ean
COMMONWEALTH

FUND

 

HOSPITAL PRICING BEHAVIOR AND PATIENT FINANCIAL RISK

Karen Davis
President
The Commonwealth Fund
One East 75" Street
New York, NY 10021

kd@cmwf.org
www.cmwf.org

Invited testimony
Subcommittee on Oversight
Committee on Ways and Means
U.S. House of Representatives
Hearing on "Pricing Practices of Hospitals"

June 22, 2004

Additional copies of this (#759) and other Commonwealth Fund publications are
available online at www.cmwf.org. To learn about new Fund publications when they
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EXECUTIVE SUMMARY

When a family member is seriously ill, we all expect that the benefits of modern
medicine will be available to provide the finest care possible. Yet, the cracks in our
fragmented health care financing system are jeopardizing the health and financial security
of millions of Americans. Hospitals play a pivotal role in making care accessible to those
who cannot pay, but they also need to be financially viable. It is especially important to
scrutinize hospital financing and pricing practices in the current environment. Hospital
costs are accelerating. At the same time, 71 million Americans are experiencing problems
paying medical bills or are paying off accrued medical debt. Access to care among the
uninsured and underserved in this country is threatened, and pricing practices at selected
hospitals are placing vulnerable patients at financial risk. We need major reforms to
improve the performance of the health care sector.

e Hospital Pricing Behavior

oO

O

Nonprofit hospitals charge patients less than for-profit hospitals (including
effective net prices after discounts).

Nonprofit hospitals admit more uninsured patients and provide more
uncompensated care than for-profit hospitals.

Prices bear little relationship to the actual cost of care. Some specialized
services, such as burn units and neonatal intensive care are "money losers";
others, such as cardiac surgery and radiological imaging services, are highly
profitable.

Pricing, uncompensated care, and bill collection practices vary widely across
nonprofit hospitals. The burden of caring for patients who cannot pay is
unevenly borne; academic health center hospitals provide more
uncompensated care than community hospitals.

The financial stability of hospitals varies widely. Some are in serious financial
difficulty, others are on the margin, and others are doing well. Hospitals in the
best position are not of the best quality or the most efficient, while those doing
the worst are largely shouldering a disproportionate share of charity care.

e The Market for Hospital Services Is Different

O

O

Hospital care is not like consuming other goods and services.
= Key differences include lack of information, limited choice,
complexity and life-critical importance of health care treatment
decisions, physicians' decision-making role, and the need for
insurance to protect financial security.
Trying to make the market work by shifting costs to patients will inflict
greater financial burdens on the sickest and most vulnerable people. Doing so
does not lead to better decisions about seeking "appropriate" or
"inappropriate" care and will not solve the fundamental problems of access,
quality, and efficiency in the health care system.
Consumer-Driven Health Care
o High deductibles, cost-sharing tiering, or premium-tiering are unlikely to be

effective in improving health system performance. They run the risk of
increasing financial burdens on the most vulnerable patients.

Tiering, or varying cost-sharing according to hospitals' quality and efficiency,
requires detailed information on cost and quality at the hospital or diagnostic
level. For the most part, these data are not systematically available. Even were
such data available and accurate, this presumes that very ill, hospitalized
patients are able to evaluate cost and quality tradeoffs, have a wide range of
options about where to go when hospitalized, and are able to make cost-
conscious choices. Furthermore, the administrative costs of such a system
would be high.

International Experience
o The United States has much higher hospital costs than any other country. The

cost per day is three times the OECD median country cost per day, and cost
per capita is twice the OECD median country.
Other countries have a greater role for government in establishing hospital
budgets or payment rates. They have also done more to rationalize care
through disease management, cost-effectiveness reviews of drugs and
procedures, and regional hospital authorities, and have much lower
administrative costs because they have one system of payment.
The Commonwealth Fund 2003 International Health Policy Survey of hospital
CEOs in five countries found that:
= The United State is the only country where respondents cited the cost
of indigent care and care for the uninsured as major problems.
= USS. hospitals are more concerned about stand-alone diagnostic or
treatment centers and about freestanding ambulatory care centers that
"cream" profitable patients.
= U.S. hospital CEOs are less open to public reporting of quality
information than CEOs in other countries.
= Hospital CEOs in all countries would make it a high priority to invest
in information technology if resources became available to do so.

Historical Perspective on How We Got Where We Are
o Hospital costs grew at a slower rate during the Nixon Economic Stabilization

Program, legislative consideration of the Carter hospital cost-containment bill,
enactment of the Medicare DRG payment system, and, during the mid-1990s,
under the threat of health reform and expansion of managed care.

Hospital costs grew most rapidly during periods when prices were determined
by health care providers rather than purchasers.

All-payer strategies, especially those by selected states in the 1970s and
1980s, were effective in slowing cost increases, ensuring access to care, and
improving equitable payment across patients and insurance sources.

The basic lesson from these experiences is that government leadership
matters. When government establishes a payment framework for purchasers-
whether Medicare, Medicaid, or employer health plans-and uses that
collective purchasing power to obtain better prices from providers, the rise in

3
hospital costs is slowed, there is greater equity, and there is better access to
care for the uninsured.

o Large purchasers such as Medicare, national managed care plans, and large
employers can also obtain good deals on their own, but they are less effective
both in controlling overall cost increases and in ensuring equitable payment
and access.

e Achieving a High-Performance Health Care System
o Given the resurgence in health care costs, the increasing numbers of
uninsured, abundant evidence that the quality of care is not what we could
have and have a right to expect, and the fact that administrative costs are now
the fastest rising component of health care expenditures, it is time to consider
a leadership role for the federal government in promoting efficiency and
quality in the health care system.
o The greatest promise for improving the performance of the health care sector
lies in:
= Public information on quality and longitudinal efficiency (i.e., total
cost of care over an episode of illness) of all health care providers.
= Private and public insurance incentive payments that reward hospitals
and other providers demonstrating superior quality and efficiency.
Purchasers are in a far better position to promote better quality and
efficiency than are individual patients.
= Limits or bands on how much prices can vary depending on payer
source. Net charges to uninsured American patients should not be
higher than discounted charges to insured patients.
= Preserving and strengthening a predominantly nonprofit hospital and
health care sector. It would be reckless to undo tax preferences for
nonprofit hospitals, given that they are a major source of
uncompensated care and community benefit. Such hospitals may
reasonably be asked not to charge uninsured patients more, to work out
feasible repayment plans, and not to employ unreasonable collection
tactics.
= Investing in the capacity to adopt modern information technology and
systems to ensure safe care. It might be useful to consider a new "Hill-
Burton" act-perhaps one that, in exchange for a new charitable
patient care obligation, provides grants and loan capital funds for
investment in information technology and systems to ensure patient
safety.
= A system of automatic and affordable health insurance coverage
for all.
HOSPITAL PRICING BEHAVIOR AND PATIENT FINANCIAL RISK

Karen Davis

Thank you, Mr. Chairman, for this invitation to testify on the issue of hospital
pricing practices. When a family member is seriously ill, we all expect that the benefits of
modern medicine will be available to provide the finest care possible. Yet, the cracks in
our fragmented health care financing system are jeopardizing the health and financial
security of millions of Americans. Hospitals play a pivotal role in making care accessible
to those who cannot pay, but they also need to be financially viable. A strong hospital
system-well equipped, professionally staffed, and ready to be of assistance in any
emergency-is essential to a strong nation. To the extent that a flawed financing system
undermines the financial security of the hospital sector, we are all at risk.

It is especially important to scrutinize hospital financing and pricing practices in
the current environment. Hospital costs increased at an annual rate of 9.5 percent in 2002,
accounting for the largest share of increases in total health expenditures.' Managed care
has reduced the ability of hospitals to cross-subsidize care for the poor and uninsured
through higher charges to privately insured patients. Hospital rates vary widely by patient
and by source of insurance coverage. In fact, uninsured patients may be charged higher
prices than better-off patients who are covered by private employer health insurance. In
response to rising insurance premiums, employers are shifting more costs to employees,
and patients are at greater financial risk." A recent Commonwealth Fund survey found
that 71 million American adults under age 65 are experiencing problems paying medical
bills or are paying off accrued medical debt.' Not surprisingly, the public is very
concerned about the affordability of health care.'

Today, I would particularly like to address current concerns about hospital pricing
practices as they affect patients; review why the market for hospital care is fundamentally

different from that of other goods and services; place the U.S. hospital cost experience in

 

'K. Levit et al., "Health Spending Rebound Continues in 2002," Health Affairs (January/February
2004): 147-159.

* Kaiser Family Foundation/Health Research and Educational Trust, Employer Health Benefits 2003
Annual Survey, September 2003.

3 The Commonwealth Fund Biennial Health Insurance Survey (2003).

4 Sara R. Collins et al., The Affordability Crisis in U.S. Health Care: Findings from The
Commonwealth Fund Biennial Health Insurance Survey, The Commonwealth Fund, March 2004.

5
an international context; and provide a historical perspective on how we got where we are
today. I would also be pleased to share some thoughts on issues regarding price
transparency, pay-for-performance pricing, pricing guidelines, the importance of the
safety net provided by nonprofit hospitals, and health care financing. In particular, the
greatest promise for improving the performance of the health care sector lies in:
e public information about the quality and efficiency of all health care providers;
e private and public insurance incentive payments that reward hospitals and other
providers demonstrating superior quality and efficiency;
e preserving and strengthening a predominantly nonprofit hospital and health care
sector;
e investing in the capacity to adopt modern information technology and systems to
ensure safe care; and

e asystem of automatic and affordable health insurance coverage for all.

HOSPITAL PRICING BEHAVIOR
Thirty-five years ago, I wrote an economics doctoral dissertation on the economic
behavior of nonprofit hospitals. It was the first systematic examination of this issue in
the newly emerging field of health economics. In my paper, I concluded that nonprofit
hospitals have more complex motivations than simply providing care to the community
while breaking even. Rather, these hospitals attempt to generate surpluses on some
services so that they can expand, add new facilities and services, and attract practicing
physicians to their staffs. In short, they want to be the best, biggest, and most well-
equipped facilities possible, while remaining financially viable. For-profit hospitals, on
the other hand, are more strongly motivated by profit-maximizing goals and returns to
owners or investors. The resulting difference is that nonprofits are more willing to
provide care that is marginally profitable or loses money in order to advance a broader
mission of excellence in patient care, medical education, and cutting-edge research.

In the intervening years, numerous studies have confirmed these basic
conclusions. A recent meta-analysis of studies on payments for care at for-profit and

private not-for-profit hospitals from the mid-1960s to the early 2000s concluded that

 

> Karen Davis, A Theory of Economic Behavior in Non-profit, Private Hospitals, doctoral dissertation
in economics, Rice University, May 1969.

6
nonprofit hospitals tend to charge less and collect lower payment rates from patients than
for-profit entities do.° For-profit hospitals have higher profits and administrative
expenses.' A meta-analysis has also shown that quality of care is better in nonprofit
hospitals, resulting in lower risk-adjusted mortality rates.*

Despite the recent publicity about selected cases of nonprofit hospitals' billing
and collection practices for uninsured patients,' it remains the case that nonprofit
hospitals are more likely to care for uninsured patients than for-profit hospitals.'° Further,
academic health centers are more likely to care for such patients than community
hospitals.'! In recent years, care for the uninsured has been increasingly concentrated in
fewer institutions willing to provide that care. Public academic health center hospitals
provide the highest levels of charity care among all hospitals, while private nonprofit
academic health centers provide twice as much free care as other private hospitals.

Also troubling is that hospital charges bear little relationship to the actual cost of
care-some services are very profitable and others are not. Specialized services such as

burn units and neonatal intensive care are "money losers," while cardiac surgery and

 

° Pp. J. Devereaux et al., "Payments for Care at Private For-Profit and Private Not-for-Profit Hospitals:
A Systematic Review and Meta-Analysis," Canadian Medical Association Journal, 170(12):1817-1824,
June 8, 2004.

7 J.M. Watt et al., "The Comparative Economic Performance of Investor-Owned Chain and Not for
Profit Hospitals," New England Journal of Medicine, 314(2):89-96, January 9, 1986.

* Pp. J, Devereaux et al., "A Systematic Review and Meta-Analysis of Studies Comparing Mortality
Rates of Private For-profit and Private Not-for-Profit Hospitals," Canadian Medical Association Journal,
166(1):1399-406, 2002.

* Reed Abelson and Jonathan D. Glater, "Nonprofit Hospitals Said to Overcharge Uninsured," New
York Times, June 17, 2004; Wall Street Journal Staff Reporters, "Lawsuits Challenge Charity Hospitals on
Care for Uninsured," Wall Street Journal, June 17, 2004; Carol Pryor et al., Unintended Consequences:
How Federal Regulations and Hospital Policies Can Leave Patients in Debt, The Commonwealth Fund,
June 2003; Carol Pryor and Robert Seifert, Unintended Consequences: An Update on Consumer Medical
Debt, Commonwealth Fund, June 2004.

01S. Lewin, T.J. Eckels, and L.B. Miller, "Setting the Record Straight: The Provision of
Uncompensated Care by Not-for-Profit Hospitals," The New England Journal of Medicine, 1212-1215,
May 5, 1988; Bradford H. Gray, "Conversion of HMOs and Hospitals: What's at Stake," Health Affairs,
29-47, March/April, 1997; Gary Claxton, Judith Feder, David Shactman, and Stuart Altman, "Public Policy
Issues in Nonprofit Conversions: An Overview," Health Affairs 9-28, March/April 1997; David Shactman
and Stuart H. Altman, "The Impact of Hospital Conversions on the Healthcare Safety Net," in Stuart H.
Altman, Uwe E. Reinhardt, and Alexandra E. Shields (eds.), The Future U.S. Healthcare System: Who Will
Care for the Poor and Uninsured? Health Administration Press; Institute of Medicine Committee on
Implications of For-Profit Enterprise in Health Care, Bradford H. Gray (ed.), For-Profit Enterprise in
Health Care, National Academy Press, 1986.

1! Commonwealth Fund Task Force on Academic Health Centers, A Shared Responsibility: Academic
Health Centers and the Provision of Care to the Poor and Uninsured, Commonwealth Fund, April 2001.

7
radiological imaging services are highly profitable.'" Not surprisingly, "niche providers,"
such as heart hospitals, orthopedic hospitals, surgical hospitals and ambulatory surgery
centers (ASCs), cancer hospitals and centers, dialysis clinics, pain centers, imaging
centers, and mammography centers, have been created to provide only those services that
are highly profitable. This further reduces the ability of "full-service" hospitals to cross-
subsidize care that is unprofitable.

In addition, managed care has made it more difficult for institutions that provide
care to the uninsured to cross-subsidize uninsured care from payments for insured
patients. Hospitals charge and collect very different prices for the same service depending
on the source of insurance-in-network commercial insurance, out-of-network
commercial insurance, negotiated contracts with different insurers and managed care
plans, Medicare, or Medicaid-or the lack of any coverage. This practice might be
viewed as equitable if net prices (after discounts) were systematically lower for poor
patients and vulnerable elderly patients. However, uninsured patients are sometimes
charged higher prices than privately insured patients, and some insurers get better breaks
than others regardless of their enrollees' income. This is one factor in the higher
premiums charged for small businesses than for large businesses for the same benefits."*

The financial stability of hospitals also varies widely. Some are in serious
financial difficulty, others are on the margin, and others are doing well. In a 2003
Commonwealth Fund survey, 30 percent of hospital CEOs reported that the current
financial situation in their hospitals was insufficient to maintain current levels of service;
38 percent reported it was sufficient to maintain current levels of service; and 32 percent
said their financial situation allowed for some improvements or expansion of care.'*
Those hospitals in the best position are not necessarily the best-quality or most efficient
ones. Instead, the hospitals that are faring worst financially are largely those shouldering
a disproportionate share of charity care without adequate compensation for fulfilling this

responsibility.

 

2 Commonwealth Fund Task Force on Academic Health Centers, Health Care at the Cutting Edge,
Commonwealth Fund, July 2000.

3 Jon R. Gabel and Jeremy D. Pickreign, Risky Business: When Mom and Pop Buy Health Insurance
for Their Employees, Commonwealth Fund, April 2004.

4 Robert J. Blendon et al., "Confronting Competing Demands to Improve Quality: A Five-Country
Hospital Survey," Health Affairs 23(3):119-135, May/June 2004.

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THE MARKET FOR HOSPITAL SERVICES IS DIFFERENT
It is easy to say patients should act like consumers, choosing among various hospitals on
the basis of cost and quality. Hospital care, however, is not like other goods and services.
Key differences include:

e lack of information

e lack of choice

e the complexity and life-critical importance of health care treatment decisions

e physicians' decision-making role in health care

e the need for insurance to protect financial security.

Simply stated, patients do not have the information to make informed choices in
health care. Information on the total bill for a hospital stay is almost never known in
advance, nor are the associated charges from physicians caring for the hospitalized
patient. Even less is known about the quality of care for the condition for which the
patient is being admitted.

Patients also often have little choice about where to go for care. Many
communities are served by only one hospital. In emergency situations, patients may
arrive by ambulance at the nearest equipped facility. For elective procedures, patients can
be admitted only to hospitals where their physicians have privileges.

Decisions about care are often made at a time of great stress (e.g., heart attack,
stroke, diagnosis of breast cancer, trauma). The acuity of illness of hospitalized patients
has increased markedly in recent years as hospital stays have shortened and discretionary
care has shifted to outpatient care. Most inpatients are very sick, and they and their
families are hardly in a position to make rational economic calculations. Hospital care is
not bought frequently like groceries, for which trial and error can lead consumers to find
the best value for their dollars. In fact, most decisions about care are made by physicians.
Doctors decide whether patients are admitted to a hospital, where they go, and what is
done to them while there.

The presence of health insurance also makes the market for health care
fundamentally different. Hospital care is typically covered by insurance, subject to
deductible or coinsurance amounts. Protection against most of the cost of hospital care is
essential to achieve one of the basic goals of insurance-to ensure financial security in

the event of a serious illness or injury. Increasing how much patients have to pay out-of-

9
pocket puts the patient at greater financial risk and may undermine the basic purpose of
having insurance. Furthermore, cost-sharing for hospital care puts greater financial
burdens on the sickest and most vulnerable people who have the least discretion in their
use of care.

Increasing the out-of-pocket cost of hospital care is not likely to lead patients to
seek care at more efficient or higher-quality hospitals. Most health care expenses are
incurred above a dollar threshold exceeding most caps on out-of-pocket liability. For
example, 5 percent of patients account for 55 percent of all health care outlays, and all of
these patients have high total expenses (in excess of $8,000 in 1997).'° Nearly all of these
patients would exceed insurance deductibles, and most would exceed maximum out-of-
pocket liability limits.

Nor are higher deductibles the answer. One-third of insured hospitalized patients
with a deductible of $1,000 or more would spend more than 10 percent of their income
out-of-pocket.'® This is a financially burdensome exposure; it effectively leaves people
underinsured.

There is growing evidence that health care is unaffordable today for many
Americans, both those who are uninsured and the increasing numbers of people who are
underinsured. The Commonwealth Fund Biennial Health Insurance Survey in 2003 found
that two of five adults under age 65 are experiencing problems paying medical bills or
have accrued medical debt.'' Undoubtedly, hospital costs are playing a significant role.
This is not just a problem for the uninsured. Among those with medical bill problems or
accrued medical debt, 62 percent reported those bills were generated when they were
insured. Even among people who are insured all year, over one-third are experiencing
medical bill problems or accrued medical debt. Raising patient cost-sharing would
exacerbate the growing unaffordability of care due to already inadequate insurance

protection.

 

15 A.C. Monheit, "Persistence in Health Expenditures in the Short Run: Prevalence and
Consequences," Medical Care 41, supplement 7 (2003): III53-II164.

1° §. Trude, Patient Cost Sharing: How Much is Too Much? Center for Studying Health System
Change, December 2003.

1" Sara R. Collins et al., The Affordability Crisis in U.S. Health Care: Findings from The
Commonwealth Fund Biennial Health Insurance Survey, The Commonwealth Fund, March 2004.

10
CONSUMER-DRIVEN HEALTH CARE

The United States is again flirting with a "new" private market strategy for controlling
health care costs called "consumer-driven" health care. This takes several forms: large-
deductible insurance plans combined with health savings accounts or health
reimbursement accounts; "tiered" cost-sharing, with patients paying more when they
obtain care from a higher-cost hospital, physician, or other provider; or tiered premiums
that let consumers pick their own package of benefits and networks of providers, with
varying premiums based on comprehensiveness of benefits and costliness and/or quality
of providers.

The high-deductible form of consumer driven health care is predicated on the
notion that health care services are overutilized, and that giving financial incentives to
patients will reduce use of services that are marginal or of no value. But the U.S. already
has relatively low hospital admission rates and short length of stays compared with other
countries. While there is certainly evidence of overutilization of some services,
underutilization appears to be a far greater problem.'® Patient cost-sharing, moreover, is
not an effective mechanism for differentiating appropriate and inappropriate care but
tends to lower use of both kinds of care.'

Most preferred provider organization plans (PPOs) that offer high-deductible
plans also extend their negotiated rates to services received before the deductible is met.
As long as patients obtain care from in-network providers, they receive the discounts that
have been negotiated by their plans. Such deductibles, however, may reduce use of
preventive care and may lead patients to forgo filling prescriptions for medications
required to keep their conditions under control. Several recent studies, in fact, have found
that tiered cost-sharing for prescription drugs has caused patients to simply not fill

prescriptions written by their physicians."°

 

18 E, A. McGlynn et al., "The Quality of Health Care Delivered to Adults in the United States," New
England Journal of Medicine, 348(26):2635-45.

19 KN. Lohr et al., "Use of Medical Care in the RAND HIE," Medical Care 24, supplement 9:S1-87,
1986; Karen Davis, "Consumer-Directed Health Care: Will it Improve Health System Performance,"
Health Services Research, forthcoming, August 2004.

20 R. Tamblyn et al., "Adverse Events Associated With Prescription Drug Cost-Sharing Among Poor
and Elderly Person," JAMA 285, no. 4 (2001): 421-429.; H.A. Huskamp et al., "The Effect of Incentive-
Based Formularies on Prescription Drug Utilization and Spending," New England Journal of Medicine
349(23):2224-32.

11
The real problem, though, is that the deductibles themselves add to patient
financial burdens. Only about 7 percent of privately insured individuals, or 8 million
adults under age 65, now have deductibles of $1,000 or more."! Increasing such
deductibles would add considerably to medical bill problems and accrued medical debt,
which already affect two of five Americans.

Consumer-driven health plans are still in their infancy and not a great deal is
known about them." Fewer than 3 million people were enrolled in such plans in 2003,
out of more than 160 million enrollees in employer health plans. In general it appears that
enrollment is relatively limited when such plans are offered as an option; healthier and
higher-income individuals are more likely to enroll; and those who do enroll are
relatively satisfied with the choice and reenrollment rates are high."*

Tiered cost-sharing plans are particularly problematic."* They require detailed
information on cost and quality at the hospital or diagnostic level-data that for the most
part are not systematically available. Even were such data available and accurate, this
presumes that very ill, hospitalized patients are able to evaluate cost and quality tradeoffs,
have a wide range of options about where to go when hospitalized, and are able to make
cost-conscious choices. Administrative costs would be high, as hospitals would need to
vary the amount they collect from patients, depending on the particular plan in which
they are enrolled. A hospital may not be equally efficient or high quality on all kinds of
diagnoses or conditions, leading to the need for detailed disaggregated data on each
service or kind of patient.

Tiered premiums have advantages over tiered cost-sharing in that they require

decisions at the time of insurance enrollment rather than hospital admission. However,

 

21 Sara R. Collins et al., The Affordability Crisis in U.S. Health Care: Findings from The
Commonwealth Fund Biennial Health Insurance Survey, The Commonwealth Fund, March 2004.

?2 Tames C. Robinson, "Hospital Tiers in Health Insurance: Balancing Consumer Choice with Financial
Incentives," Health Affairs Web Exclusive, W3-135-146, March 19, 2003; Jon R. Gabel, Anthony T. Lo
Sasso, and Thomas Rice, "Consumer Driven Health Plans: Are They More Than Talk Now?", Health
Affairs Web Exclusive, November 2002; J. R. Gabel, H. Whitmore, T. Rice, and A. T. Lo Sasso,
"Employers' Contradictory Views About Consumer-Driven Health Care: Results of a National Study,"
Health Affairs Web Exclusive (April 21, 2004): W4-210-W4-21

3 Karen Davis, "Consumer-Directed Health Care: Will it Improve Health System Performance,"
Health Services Research, forthcoming, August 2004.

4 Robert Steinbrook, "The Cost of Admission: Tiered Copayments for Hospital Use," New England
Journal of Medicine 350(25):2539-2542; Thomas M. Priselac, "The Erosion of Health Insurance: The
Unintended Consequences of Tiered Products by Health Plans," Health Affairs Web Exclusive, W3-158-
161, March 19, 2003; Marjorie E. Ginsburg, "Hospital Tiering: How Will it Play in Peoria," Health Affairs
Web Exclusive, W3-154-157, March 19, 2003.

12
they have many of the same information requirements and would need to be structured in
a way that does not penalize those who cannot afford a higher-quality, but higher-cost,

provider.

INTERNATIONAL EXPERIENCE

It is not the case that high out-of-pocket spending is necessary to control health care
costs. Other countries manage to spend considerably less on health care and have little or
no patient cost-sharing. Nor has managed care in the U.S. provided a magic bullet to
control health care spending. U.S. health expenditures over the 1990s went up the same
as the average for all industrialized nations (3.1 percent annually in real terms in the U.S.
vs. 3.0 percent for the median OECD country)."° Canada and Germany had markedly
slower health expenditure growth rates between 1991 and 2001 (2.1 and 2.4 percent
annual real growth, respectively).

In particular, the U.S. has much higher hospital costs than any other country. But
this is not because Americans get more hospital care. In fact, U.S. hospital admission
rates are below the average of all industrialized nations, and lengths of stay are shorter."°
Yet, in the U.S., hospital cost per day is very high-three times the OECD median cost
per day-and overall the U.S. spends twice the OECD hospital cost per capita.

The difference is that in all other countries, the government has a major role in
setting hospital budgets or payment rates. Other countries also regulate the supply of
hospital capacity, specialized facilities, and specialist physicians. The U.S. has more
specialist physicians, and they are compensated more highly. U.S. specialist physicians
are typically paid on a fee-for-service basis, whereas specialists in other countries are
typically salaried under negotiated agreements and work full-time for a hospital. Other
countries also have much lower administrative costs, because they have a single system

of payment with a single set of rules and payment rates for all patients."'

 

5 Uwe E. Reinhardt, Peter S. Hussey, and Gerard F. Anderson, "U.S. Health Spending in an
International Context," Health Affairs, May/June 2004.

© Gerard F. Anderson, Varduhi Petrosyan, and Peter S. Hussey, Multinational Comparisons of Health
Systems Data, 2002: Based on Data from the Organization for Economic Cooperation and Development,
The Commonwealth Fund, October 2002.

27 Uwe E. Reinhardt, Peter S. Hussey, and Gerard F. Anderson, "U.S. Health Spending in an
International Context," Health Affairs, May/June 2004.

13
Other countries also have done more to rationalize care, through disease
management, cost-effectiveness reviews of drugs and specialized procedures, and
regional hospital authorities."® This is not to say that it is desirable or feasible to adopt all
of the features of other systems. Most Americans, for example, would be unwilling to
accept the longer waiting times for elective procedures typical in budgeted systems. But
we could learn from international innovations and benefit from that experience.

It is also not the case that spending more on health care necessarily leads to higher
quality care."' A recent international comparison of quality indicators found that quality
of care is not systematically better in the U.S. The U.S. is in the mid-range on many
health outcome and quality of care indicators-better than other countries on some
measures, worse on others.*' For example, five-year survival rates following kidney
transplants are 13 percent better in Canada than in the U.S., while five-year survival rates
for breast cancer are 14 percent better in the U.S. than in England.

A recent survey of hospital CEOs in five countries provides interesting insight
into how U.S. hospitals compare with those of other countries.*! The Commonwealth
Fund 2003 International Survey of Hospital CEOs found that:

e U.S. hospital CEOs are much more negative than their counterparts in Australia,

Canada, New Zealand, and the U.K. about their nation's health care system

e The US. is the only country where hospital CEOs cite the cost of indigent care
and care for the uninsured as major problems

e USS. hospitals are in somewhat better financial position, on average, than
hospitals in other countries, but this varies across hospitals

e US. hospitals are more likely to experience emergency room diversions and turn

patients away

 

?8 See for example, Reinhard Busse, "Disease Management Programs in Germany's Statutory Health
Insurance System," Health Affairs, May/June 2004. Steven Morgan et al., "Outcomes-Based Drug
Coverage in British Columbia," Health Affairs, May/June 2004.

° Karen Davis, et al., Mirror, Mirror on the Wall: Looking at the Quality of American Health Care
through the Patient's Lens, The Commonwealth Fund, January 2004.

> Peter S. Hussey et al., "How Does the Quality of Care Compare in Five Countries?" Health Affairs,
May/June 2004; The Commonwealth Fund International Working Group on Quality Indicators, First
Report and Recommendations of the Commonwealth Fund's International Working Group on Quality
Indicators: A Report to Health Ministers of Australia, Canada, New Zealand, the United Kingdom, and the
United States, The Commonwealth Fund, June 2004.

31 Robert Blendon et al., "Confronting Competing Demands to Improve Quality," Health Affairs,
May/June 2004; David Blumenthal, et al., 4 Five-Nation Hospital Survey: Commonalities, Differences, and
Discontinuities, The Commonwealth Fund, May 2004.

14
e USS. hospitals are more concerned about stand-alone diagnostic or treatment
centers and freestanding ambulatory care centers "creaming" profitable patients

e USS. hospital CEOs are less open to public reporting of quality information than
CEOs in other countries

e Hospital CEOs in all countries would place a high priority on investing in

information technology should resources become available to do so.

HISTORICAL PERSPECTIVE ON HOW WE GOT WHERE WE ARE

While other countries have long been comfortable with a more activist role for
government in health care financing, the U.S. has had only sporadic, mostly short-lived
attempts to shape the health care sector through governmental policy." Instead, we have
primarily relied on private markets to determine hospital prices and hospital capacity.
Only for patients covered by public insurance programs-Medicare and Medicaid-has
government had a major role in establishing payment rates.

Yet, the historical record of government intervention in hospital pricing, when it
has happened, has been positive for the most part. The first major intervention occurred
under President Nixon with the establishment of economy-wide price controls under the
Economic Stabilization Program (ESP) from August 1971 to 1975. In the period prior to
ESP, hospital expenses were increasing considerably faster than overall price inflation.**
When hospitals and other providers autonomously set prices, the average real annual rate
of increase in community hospital expenses from 1950 to 1965 was 8.3 percent, fueled by
growth in private insurance paying hospitals on the basis of charges set by hospitals.
From 1966 to 1971, real hospital expenses increased 11.6 percent annually, spurred
upward by introduction of Medicare and Medicaid. Even though Medicare and Medicaid
reimbursed on the basis of costs, hospitals were assured reimbursement for incurred
expenses. By contrast real hospital expenses grew by "only" 6.1 percent during the ESP
period. When controls were lifted, hospital costs again accelerated, averaging a real

increase of 8.7 percent over 1975 to 1977.

 

32 Karen Davis, Gerard F. Anderson, Diane Rowland, and Earl P. Steinberg, Health Care Cost
Containment, Johns Hopkins Press, 1990; Karen Davis et al., "Is Cost Containment Working?" Health
Affairs, 4(1):81-94, Fall 1985; Drew E. Altman and Larry Levitt, "The Sad History of Health Care Cost
Containment as Told in One Chart," Health Affairs, January 23, 2002

33 Karen Davis, Gerard F. Anderson, Diane Rowland, and Earl P. Steinberg, Health Care Cost
Containment, Johns Hopkins Press, 1990.

15
The second attempt by the federal government was the proposed Carter Hospital
Cost Containment Act, which was considered by Congress from 1977 to 1979. The
legislation would have placed a limit on the rate of increase in payments to hospitals tied
to market basket inflation. But the legislation failed when the hospital industry mounted a
"Voluntary Effort" to control costs. During this period, increases in hospital costs
adjusted for economy-wide inflation rose 3.1 percent annually. But defeat of legislation
ended the "Voluntary Effort" and hospital costs subsequently rose 7.8 percent in real
terms in the 1981-1983 period."

The rise of hospital costs when the threat of controls was removed-and
particularly the implications for Medicare budgetary outlays-led to enactment of the
Tax Equity and Fiscal Responsibility (TEFRA) legislation in 1982. TEFRA established
Carter-like limits on increases in hospital payments only for Medicare. This was followed
by legislation in 1983 creating the Diagnosis-Related Group (DRG) method of Medicare
prospective hospital payment. Again hospital costs stabilized, increasing by 3.2 percent
annually in real terms in the immediate post--Medicare PPS period (1984-86). One major
effect was a sharp decline in average length of stay-undoubtedly related to the shift in
Medicare payment methods from cost to a fixed rate for hospital stay.*°

But holding down Medicare payment rates did not succeed in controlling costs to
private insurers, leading to a resurgence in total spending. The Clinton Health Security
Act legislation in 1993 again proposed a major role for government in controlling health
care costs. In the wake of its failure, employers turned to managed care plans to
ameliorate health care cost inflation. In the mid-1990s, the threat of health reform,
combined with the expansion of managed care, led to a marked slow-down in health care
spending, most notably in hospital care spending.*° Managed care plans used their
negotiating power to obtain discounted payment rates from hospitals, physicians, and

other providers. The discounted rates reduced physician real incomes and hospital

 

34 Karen Davis, Gerard F. Anderson, Diane Rowland, and Earl P. Steinberg, Health Care Cost
Containment, Johns Hopkins Press, 1990; Karen Davis, "Recent Trends in Hospital Costs: Failure of the
Voluntary Effort," testimony before U.S. House of Representatives, Committee on Energy and Commerce,
Subcommittee on Health and the Environment, hearing on "Increase in Hospital Costs: Is the Voluntary
Effort Working?" December 15, 1981.

35 Karen Davis, Gerard F. Anderson, Diane Rowland, and Earl P. Steinberg, Health Care Cost
Containment, Johns Hopkins Press, 1990.

36 Drew E. Altman and Larry Levitt, "The Sad History of Health Care Cost Containment as Told in
One Chart," Health Affairs, January 23, 2002

16
margins, but they proved to be unsustainable.*' A pushback by providers led to a
resurgence of health care costs in the early 2000s.*®

Several state governments also stepped forward to fill the void in federal policy,
particularly in the 1970s and 1980s. The most prominent of these were "all-payer rate
setting" programs, particularly those in Connecticut, Maryland, Massachusetts, New
Jersey, New York, and Washington. While in effect, these states experienced increases in
hospital costs three to four percentage points a year lower than other states.°? Between
1976 and 1984, the rate of increase in hospital expenses per adjusted admission was 87
percent less in rate-setting states than in non-regulated states.*" The programs also helped
stabilize hospital finances and contributed to fairly equitable payment rates across
patients insured by different insurers. Many created mechanisms for explicitly cross-
subsidizing hospitals providing uncompensated charity care. Yet, the anti-regulatory
mood of the era led to the repeal of these efforts, with the notable exception of Maryland.

The basic lesson from this historical experience is that government leadership
matters. When government establishes a payment framework for purchasers-whether
Medicare, Medicaid, employer health plans-and uses that collective purchasing power
to set or negotiate prices from providers, the rise in hospital costs is slowed, there is
greater equity by income of patients and across different sources of coverage, and better
access to care for the uninsured. Large purchasers-Medicare, national managed care
plans, large employers-can also obtain good deals on their own, but they are less
effective both in controlling overall cost increases and in ensuring equitable payment and
access. A fragmented financing system, with each payer setting its own rules, also inflicts
a toll in the form of higher administrative costs. On the flip side, if purchasers join
together to exact steep discounts, this system may undermine the financial stability of the

hospital sector, dampen investment in innovation such as information technology, and

 

37 Karen Davis and Barbara S. Cooper, American Health Care: Why So Costly? Testimony for the
Senate Appropriations Subcommittee, June 2003.

38 Karen Davis and Barbara S. Cooper, American Health Care: Why So Costly? Testimony for the
Senate Appropriations Subcommittee, June 2003

3° Karen Davis, Gerard F. Anderson, Diane Rowland, and Earl P. Steinberg, Health Care Cost
Containment, Johns Hopkins Press, 1990; Karen Davis, "Recent Trends in Hospital Costs: Failure of the
Voluntary Effort," testimony before U.S. House of Representatives, Committee on Energy and Commerce,
Subcommittee on Health and the Environment, hearing on "Increase in Hospital Costs: Is the Voluntary
Effort Working?" December 15, 1981.

* Carl J. Schramm, Steven C. Renn, and Brian Biles, "Controlling Hospital Cost Inflation: New
Perspectives on State Rate Setting," Health Affairs, 5:22-33, Fall 1986.

17
undermine important social missions, including the promotion of cutting-edge research,

education, and excellence in patient care.

PUBLIC POLICY OPTIONS

Given the resurgence in health care costs, the increasing numbers of uninsured, abundant
evidence that the quality of care is not what we could have and have a right to expect, and
the fact that administrative costs are now the fastest rising component of health care
expenditures, it is time to consider a leadership role for the federal government in
promoting efficiency and quality in the health care system.*! Many health care market
participants are now willing to consider strong governmental intervention to repair the
health care system." Neither the market reforms of the last two decades nor consumer-
driven health care provide the needed impetus for fundamental change in the quality and
efficiency in the U.S. health care system.

My own view is that the greatest promise lies in a combination of improved
information on quality and efficiency, pay-for-performance purchasing by private and
public insurers, and investment in the capacity to modernize the health care system. Most
fundamentally, we need a streamlined, automatic health insurance system that ensures all

Americans have access to affordable health care.

Price Transparency
It is hard to improve if you have no idea how you are performing or the results that others
are achieving. While I am skeptical about the ability of consumer financial incentives to
bring about fundamental change in health care, I do think that information on quality and
efficiency at the individual provider level is absolutely essential if health care
organizations are to improve their performance.

What is needed is not so much information on prices of individual hospital or

physician services-which are often meaningless-but information on the total cost of

 

"! Karen Davis, "Achieving a High Performance Health System," Commonwealth Fund 2003 Annual
Report, January 2004; Stephen C. Schoenbaum, Anne-Marie J. Audet, and Karen Davis, "Obtaining
Greater Value from Health Care: The Roles of the U.S. Government," Health Affairs, November 2003;
Karen Davis, Cathy Schoen, and Steve Schoenbaum, "A 2020 Vision for American Health Care." Archives
of Internal Medicine, December 2000.

"2 Len M. Nichols et al., "Are Market Forces Strong Enough to Deliver Efficient Health Care Systems?
Confidence is Waning," Health Affairs 23(3):8-21, March/April 2004.

18
care over an episode of illness or period of time. If a patient goes to a hospital where he
or she will be seen by 10 different physicians and spend a long time in the intensive care
unit, it is the total bill for hospital, physician, and other services that is of concern to the
patient, not the daily room rate or the charge for a day of intensive care. Further, if a
hospital discharges a patient quickly but fails to help the patient learn effective self-care
techniques, the patient may be quickly readmitted. So it is not the price per service or the
total hospital bill for a stay that is relevant, but the total charges for all services over a
period of time for the kind of condition and complexity faced by the patient.

John Wennberg and colleagues recently demonstrated that use of hospitals,
intensive care days, physician visits, number of physicians involved in care, and use of
hospice care in the last six months of life varied widely for the 77 leading U.S.
hospitals.** Days in hospital per decedent ranged from 9.4 to 27.1; days in intensive care
ranged from 1.6 to 9.5; number of physician visits ranged from 17.6 to 76.2; percentage
of patients seeing 10 or more physicians ranged from 16.9 percent to 58.5 percent, and
hospice enrollment ranged from 10.8 percent to 43.8 percent. In short, it is "practice
style" that leads to wide variations in the use of health care resources. Patients have
almost no ability to know how they will be treated, what services they will need, or what
the total bills will be when they experience life-threatening conditions. Generating
information on provider "longitudinal efficiency"-that is, the total cost of care over an
episode of illness or over a period of time-could begin to shed light on best practices
and lead hospitals to emulate the practices of high-performing organizations.

But efficiency is not the only important dimension. Quality is equally important.
Steven Grossbart at Premier, Inc., recently demonstrated wide variation in both cost and
quality across Premier hospitals."* For example, he found a five-fold variation in poor
outcomes adjusted for complexity for coronary artery bypass graft, and a two-fold
variation in cost per case, similarly adjusted for case-mix complexity.

One of the difficulties with generating this information is the absence of a multi-

payer claims data base with unique provider identification. One important step would be

 

8 John E. Wennberg et al., "Use of Hospitals, Physician Visits, and Hospice Care During Last Six
Months of Life Among Cohorts Loyal to Highly Respected Hospitals in the United States," British Medical
Journal 328:607:1-5, March 13, 2004.

"4S. Grossbart, Ph.D., Director, Healthcare Informatics, Premier, Inc., The Business Case for Safety
and Quality: What Can Our Databases Tell Us," Fifth Annual National Patient Safety Foundation Patient
Safety Congress, March 15, 2003.

19
for Medicare to lead in forging a collaboration among Medicare, Medicaid, and private
insurers to assemble such a multi-payer claims database and make it widely available to
researchers and providers. After improving the accuracy and validity of the data, public
information on provider quality and efficiency could be a very strong motivator for
improvement. A thoughtful middle ground has been proposed that would:

e engage providers as "coauthors" working to improve the quality of the tools and
to ensure that appropriate caveats about weaknesses in the analyses are on
prominent display;

e include a multidimensional approach to reporting on quality to help ensure that
various dimensions and attributes are considered;

e not tying consumer copayments to tiers;

e including both quality and cost in financial rewards for providers;

e transparency to purchasers, providers, and patients;

e physician data aggregated at the physician group level; and

e collaboration among payers, purchasers, patients, and providers in development of

systems of public accountability.*

Pay for Performance
The natural desire of physicians and other health care leaders to provide high-quality care
may be adequate to stimulate improvement once such a database is created. However, it
would also be important for purchasers (Medicare, Medicaid, private insurers) to reward
high-performance hospitals that demonstrate better quality and efficiency, as well as
high-performance integrated health systems and accountable physician group practices.
Purchasers are in a far better position to promote better quality and efficiency than are
individual patients.

There are more than 75 pay-for-performance programs across the U.S. including
those that are provider-driven (e.g., Pacificare), insurance driven (Blue Cross/Blue Shield
in Massachusetts), and employer driven (Bridges to Excellence).*° The new Medicare

Modernization Act also calls for demonstrations to provide bonuses to physicians on a

 

** Thomas H. Lee, Gregg S. Meyer, and Troyen A. Brennan, "A Middle Ground on Public
Accountability," New England Journal of Medicine 350:23:2409-2412, June 3, 2004.
"6 Leapfrog Group, draft report to The Commonwealth Fund, 2004.

20
per-beneficiary basis when quality standards are met. Several states have built
performance-based incentives into Medicaid contracts, including Iowa, Massachusetts,
Rhode Island, Utah, and Wisconsin.

The U.K.'s new contract with general practitioners also includes bonuses pegged
to quality performance." Up to 18 percent of physician practice earnings will be at risk.

Physicians were heavily involved in selecting the 146 performance measures.

Pricing Guidelines

The current system of hospital pricing is clearly inequitable and administratively
inefficient. A major effort should be mounted to identify ways of reducing providers'
administrative costs and simplifying payer rules and pricing practices.

It will also be important to address in some way the wide disparities in prices
faced by different sets of patients. It would be reasonable to consider limits or bands on
how much prices can vary depending on payer source (perhaps pegged to a percentage of
Medicare DRG payment rate). Given urgent concerns about the financial burdens on
uninsured and low-income underinsured Americans, net charges (after discounts) to such
patients certainly should not be higher than those charged insured patients.

We should also remember that all-payer rate-setting worked well in the past. It
was much simpler administratively than our current system, much more equitable, and
more effective in controlling costs. It may need to be revisited if upward cost pressures

and financial instability in the hospital sector persist.

Preserving and Strengthening the Safety Net

In the current environment, nonprofit hospitals that provide uncompensated care to the
uninsured and fulfill other vital social missions should be preserved and strengthened. It
would be reckless to undo tax preferences for nonprofit hospitals. They are a major
source of uncompensated care and community benefit. The current community benefits
standard is broader than just charity care-some hospitals make a contribution through
provision of high-cost "unprofitable" services such as burn care and trauma care; others

make a contribution through medical education and training health professionals.

 

47 Peter Smith and Nick York, "Quality Incentives: The Case of U.K. General Practitioners," Health
Affairs May/June 2004.

21
It may be reasonable to refine expectations about what nonprofit hospitals should
contribute to their community. It is reasonable to ask that the uninsured not be charged
more than other patients, and that hospitals work out feasible repayment plans and not
employ unreasonable collection tactics. Certainly if there is a major emergency, whether
a fire in a nightclub or a terrorist attack, we want hospitals to open their doors to all
victims regardless of their ability to pay.

At one time, hospitals had an obligation to provide charity care in exchange for
grant and loan capital funds received in the past. It might be useful to consider a new
"Hill-Burton" act, perhaps one that, in exchange for providing charitable care, would
make available grants and loan capital funds for investment in information technology
and systems to enhance patient safety.

Alternatively, the disproportionate share allowance for hospitals could be better
targeted, for example, providing payments at some percentage of the Medicare DRG
payment rate for each uninsured patient served. Some portion might be specified for
investment in modern information technology or systems to prevent medical errors.
These measures are not just important in the short term. Even as we move to improve
insurance coverage, it is important to preserve the safety net to ensure that health care is
open to those who are difficult to insure-immigrants, the homeless, the mentally ill-
and that all patients can receive patient-centered, culturally competent care.

We also need to ensure that our nation's academic health centers are able to
continue their vital social missions of investing in cutting-edge research, providing
specialized care that may not be profitable but is nonetheless valued by society, and

training new generations of medical leaders and health professionals.

Insurance Coverage and Access to Care for Vulnerable Populations

We will never have an efficient and equitable system so long as millions of Americans go
without health insurance coverage. Over 85 million Americans are uninsured at some
point over a four-year period,"* and millions more are underinsured. Two of five
Americans are struggling with medical bill problems or paying off medical debts.
Tinkering with hospital prices and cost-sharing will do little to solve this problem. A

 

48 Pamela Farley Short, Deborah R. Graefe, and Cathy Schoen, Churn, Churn, Churn: How Instability
of Health Insurance Shapes America's Uninsured Problem, The Commonwealth Fund, November 2003.

22
bolder strategy is urgently needed. Fundamental reform requires automatic and affordable

insurance coverage for all. Thank you for the opportunity to be here today.

23
 

 

THE

COMMONWEALTH
FUND

 

Hospital Pricing and
Patient Financial Risk

Karen Davis
President, The Commonwealth Fund
June 22, 2004

Hearing on Pricing Practices of Hospitals
Subcommittee on Oversight
Committee on Ways and Means
U.S. House of Representatives

 

 

 

Average Annual Growth in Hospital
Costs, 1988-2002

Percent

9.5
8.8
8 - 7.5
7 4
6 4
5 as 4.0
3 4
2 4
1 4
0 1 1

1988-1993 1993-1997 1997-2000 2000-2001 2001-2002

THE
COMMONWEALTH
FUND

 

Source: K. Levit et al., "Health Spending Rebound Continues in 2002," Health Affairs
(January/February 2004): 147-159.

  

 

24

 

 
 

 

Hospital Costs Are a Major New Source of
Increased Outlays, 2002

 

100% -
Hospital
80% + 34%
22%
| Rx Drugs
40% 16%
20% + All other*
34%
0% +

 

Share of Spending Increase

* Includes spending for dental, other professional, and other personal health care services; home health and nursing
home care; durable and other nondurable medical products; administration and insurance net cost; government public
health; medical research; and medical construction.

Source: K. Levit et al., "Health Spending Rebound Continues in 2002," Health Affairs
(January/February 2004): 147-159.

  

THE
COMMONWEALTH

 

 

 

Trends in Operating Margins of All Hospitals
and Academic Health Centers, 1994-1999

-@- AHCs -*-All Hospitals

   

   

 

 

6% -
4.6%
3.9% 4.0%

4% +

wee Otte e 2.1%
2%) 2.5% = 2% mH

1.8% "*>..
0% T T T T 0.6% ~ STy . 1
"se

-2% =1 10%

1994 1995 1996 1997 1998 1999

Note: Operating Margin = (Net revenue - Non-operating Revenue - Hospital Expense)/(Net Revenue - Non-Operating
Revenue). AHC includes reported community hospitals data only; Total includes reported and imputed community
hospital data only.

Source: Commonwealth Fund; Report by Allen Dobson, Lane Koenig, Namrata Sen, Silver Ho,
Lewin Group, Analysis of AHA Annual Survey data.

THE
COMMONWEALTH
FUND

 

 

25

 

 
 

 

Current Financial Situation of
U.S. Hospitals

 
   

Insufficient to
maintain current
levels of service

30%

Allows for some
improvement or
expansions of care

32%

Sufficient to maintain
current levels of service

38%

THE
COMMONWEALTH

 

Source: 2003 Commonwealth Fund International Health Policy Survey of Hospital CEOs.

 

 

 

Trends in Payment to Cost Ratios by
Payer for All U.S. Hospitals, 1994-1999

Payment to Cost Ratio

4.40 -#- Private Payer -* Medicare -®- Medicaid

+ 1.24
1.30 1.24 4.22

1.17 1.16 1.415

1.20 -

1.10 -

1.00 -

 

0.90 -

 

 

 

0.80 T T T T T 1
1994 1995 1996 1997 1998 1999
Note: Includes reported community hospital data only.

Source: Commonwealth Fund; Report by Allen Dobson, Lane Koenig, Namrata Sen, Silver Ho,
Lewin Group, Analysis of AHA Annual Survey data.

THE
COMMONWEALTH
FUND

 

 

26

 

 
 

 

Health Care Costs Concentrated in Sick Few

Distribution of Health Expenditures for the U.S.
Population, By Magnitude of Expenditure, 1997

Expenditure

 

 

0% 5 ae (1997 Dollars)
10% - 10% -__-_
son | $27,914
Lh -
40% -
cove | 50% $7,995
h -
80% {|
90% | $351
100% -
U.S. Population Health Expenditures

THE
COMMONWEALTH

Source: A.C. Monheit, "Persistence in Health Expenditures in the Short Run:
Prevalence and Consequences," Medical Care 41, supplement 7 (2003): II153-I1164.

 

 

 

 

 

Percent of Hospitalized Patients with '
Out-of-Pocket Costs Exceeding 10% of
Income by Cost-Sharing Amount
Percent
60
50
40 32
30 24
a
10
0
Modest $100 $500 $1000 $2500

Modest Co-payments Option has $20 co-pay for physician visits, $150 co-pay for ED visits, and $250 co-pay per day inpatient
hospitalization; $100 Deductible Option has 10% in-network coinsurance and 20% out-of-network coinsurance; $500 Deductible
Option has 20% in-network coinsurance and 30% out-of-network coinsurance; $1000 Deductible Option has 20% in-network
coinsurance and 30% out-of-network coinsurance; $2500 Deductible Option also 30% in-network coinsurance, 50% out-of-
network coinsurance; Maximum out-of-pocket limits are set at $1,500 more than deductible for all options.

Source: S. Trude, Patient Cost Sharing: How Much is Too Much? Center for Studying
Health System Change, December 2003.

THE
COMMONWEALTH
FUND

 

 

27

 

 
 

 

Two of Five Adults Have Medical Bill Problems
or Accrued Medical Debt:* Uninsured and
Low Income Most at Risk

Percent of adults ages 19-64 with any medical bill problem or outstanding debt

HAIl @ Uninsured LC Continuously insured

 

 

 

 

 

 

 

 

 

 

 

 

75
60 62
53 57
50 a 45
35
32 29
25
0 T T 1
Total Income less than $35,000 Income $35,000 or more

* Problems paying/not able to pay medical bills, contacted by a collection agency for medical bills,
had to change way of life to pay bills, or has medical debt being paid off over time.

Note: Income groups based on 2002 household income. commen
Source: The Commonwealth Fund Biennial Health Insurance Survey (2003).

 

 

 

 

Average Annual Growth Rate of Total Health
Care Spending per Capita Between 1991 and
2001 in Selected Countries

 

 

Percent

5.0 -

4.0 -

3.0 +

2.1

2.0 +

1.0 -

0.0 =

Australia United Japan United OECD France Germany Canada
Kingdom Zealand States Median
Source: U.E. Reinhardt, P.S. Hussey, and G.F. Anderson, "U.S. Health Care commas

Spending in an International Context," Health Affairs (May/June 2004): 10-25.

 

 

28

 

 
 

 

10

Hospital Spending per Capita in 2000
Adjusted for Differences in the Cost of Living

 

 

Dollars
1,600 , 1,498
1,400 -
1,200 -
1,000 - 929 823
800 | 708 618 581
600 -
400 -
200 -
0 t 1 T T
United France Canada Germany Australia - Japan.
States

41998
> 4999

THE
COMMONWEALTH

Source: G. Anderson et al., Multinational Comparisons of Health Systems Data, 2002,
The Commonwealth Fund, October 2002.

 

 

 

 

 

 

11
Hospital Admissions for Acute Care
per 1,000 Population in 2000
Number of admissions per 1,000 population
250 -
205 204
200 -
155 154 151
99
100 -
. | i
0 7 T T T T T T
Germany France. Australia OECD England United Canada.

Median States
2 1999

THE
COMMONWEALTH
FUND

Source: G. Anderson et al., Multinational Comparisons of Health Systems Data, 2002,
The Commonwealth Fund, October 2002.

 

 

29

 

 
 

 

12

Average Length of Hospital Stay for
Acute Care

Days
10.0

8.0

9.6
mT 646 62 «6.2 59 5s

6.0 ° 4.9

4.0

2.0 [

0.0 - t 4 r r ~

Germany Canada' OECD Australia England' United France New ,

. b
2000 Median States Zealand
> 4999

© 1998

THE
COMMONWEALTH

Source: G. Anderson et al., Multinational Comparisons of Health Systems Data, 2002,
The Commonwealth Fund, October 2002.

 

 

 

 

13
Kidney Transplant Five-Year

Relative Survival Rate

Standardized Performance on Quality Indicator
100=Worst Result; Higher Score=Better Results

 

 

120 |
100 |
80 |
60 -
40 ;
20 ;
0
United United Australia Canada
States Kingdom Zealand

THE
COMMONWEALTH
FUND

Source: P.S. Hussey et al., "How Does the Quality of Medical Care Compare in
Five Countries?" Health Affairs, May/June 2004.

 

 

30

 

 
 

 

14

Satisfaction with the Health Care System

 

 

Percent
CL] Somewhat satisfied & Very satisfied
100 ;
4
12 16 8
75 +
50 - 93 82 4
76 77
25 | 47
Oo T T T T 1
AUS CAN NZ UK US

THE
COMMONWEALTH

 

Source: 2003 Commonwealth Fund International Health Policy Survey of Hospital CEOs.

 

 

 

Disclosing Hospital Quality Information °

to the Public: Views of Hospital CEOs
in Five Nations

Percent saying should NOT
be released to the public:

 

AUS CAN NZ UK US

 

Mortality rates for specific 34% 26% 18% 16% 31%

 

 

 

 

 

conditions

Frequency of specific 16 5 4 13 45
procedures

Medical error rate 31 18 25 15 40
Patient satisfaction 5 2 oO 1 17
ratings

Average waiting times for 6 1 0 1 29
elective procedures

Nosocomial infection rates 25 10 25 9

 

 

 

 

THE
COMMONWEALTH
FUND

 

Source: 2003 Commonwealth Fund International Health Policy Survey of Hospital CEOs.

 

31

 

 
 

 

16
If You Had New Funding to Invest in a

One-Time Capital Improvement to Improve
Quality of Patient Care in One Area of Your
Hospital, What Would it Be?

 

 

 

 

Percent saying: AUS CAN NZ UK US
Electronic medical records/IT 35% 47% 46% 38% 62%
Emergency room/OR/Critical care 26 418 4 22 13

facility

Basic hospital/patient facilities 17 14 21 22 3

 

Diagnostic equipment/medical

technology 9 14 #11 #10 3

 

 

 

 

THE
COMMONWEALTH

 

Source: 2003 Commonwealth Fund International Health Policy Survey of Hospital CEOs.

 

 

 

17
Average Annual Rate of Increase in Real

Community Hospital Expenses, 1950-1986

Percent Medicare &
Medicaid
14 -
Private 11.6
125 Health
Insurance Post-ESP
10 - Market Era

 

6 | HCC & VE ve"
4-

2 4

0- +

1950-1965* 1966-1971* 1972-1974 1975-1977 1978-1980 1981-1983 1984-1986

* Annualized.

Source: K. Davis et al., Health Care Cost Containment, Baltimore: Johns Hopkins
University Press, 1990, p. 171.

THE
COMMONWEALTH
FUND

 

 

32

 

 
 

 

18
Cost-Sharing Reduces Likelihood of

Receiving Effective Medical Care

Probability of receiving highly effective care for acute conditions that
is appropriate and necessary compared to those with no cost-sharing

Percent Children 0 Adults
100

85

80 71

56 59
60
40

20

 

 

 

- 7
Low-Income in Cost-Sharing Plans Higher-Income in Cost-Sharing
Plans

Source: K.N. Lohr et al., Use of Medical Care in the RAND HIE. Medical Care 24, come
supplement 9 (1986): S1-87.

 

 

 

 

19
Cost-Sharing Reduces Both Appropriate
and Inappropriate Hospital Admissions

Percent reduction in number of hospital admissions per 1,000 person-years

30 27
25
20
15
10

5

0

  

Appropriate Admissions* Inappropriate Admissions*

* Based on Appropriateness Evaluation Protocol (AEP) instrument developed by
Boston University researchers in consultation with Massachusetts physicians

Source: A.L. Siu et al., "Inappropriate Use of Hospitals in a Randomized Trial of Health \°" Fun"
Insurance Plans," New England Journal of Medicine 315, no. 20 (1986): 1259-1266.

 

 

 

33

 
 

 

20
Cost and Quality Vary Widely Across Hospitals

 

 

Coronary Artery Bypass Graft:
Observed/Expected Cost vs. Observed/Expected Quality Outcomes
by Hospital
2.0
High Cost
e
e
15 e
8 al ° °
e e
e8 e .%e,%0 % eye o
gi 10 «Fey "* °
2 e eee
3 5 e e & 8 e
68 e
3 os
Low Cost
0.0 - High Quality tow Quality
0.0 0.5 1.0 15 2.0 2.5

Poor Outcomes - Observed/Expected

Source: S. Grossbart, Ph.D., Director, Healthcare Informatics, Premier, Inc.,
"The Business Case for Safety and Quality: What Can Our Databases Tell Us,"
5 Annual NPSF Patient Safety Congress, March 15, 2003.

THE
COMMONWEALTH

 

 

 

 

 

21
Pay for Performance Programs

e There are over 75 pay-for-performance programs across
the U.S.
Provider driven (e.g., Pacificare)
Insurance driven (e.g., BC/BS in MA)
Employer driven (e.g., Bridges to Excellence-
Verizon, GE, Ford, Humana, P&G, and UPS)
Medicare
¢ 2003 Medicare Rx legislation demonstrations of
Medicare physicians a per-beneficiary bonus if
specified quality standards are met
Medicaid
e Rite Care will pay about 1% bonus on its capitation
rate to plans meeting 21 specified performance
goals
¢ 4 other states built performance-based incentives
into Medicaid contracts-UT, WI, 10, MA

e Evaluation of impact still pending

THE
COMMONWEALTH
FUND

 

Source: Leapfrog report, draft for Commonwealth Fund.

 

34