Healthcare Cost Increases: Can They Be Managed Effectively?

Transcription

1 Healthcare Cost Increases: Can They Be Managed Effectively? Actuarial Society of Hong Kong Evening Talk February 24, 2006 Howard J. Bolnick, FSA, MAAA, HonFIA Chairman, IAA Health Section Adjunct Professor of Finance, Kellogg GSM 2006, Howard J. Bolnick All Rights Reserved

2 Healthcare Cost Increases: Can They Be Managed Effectively? Generalized Risk Management Analysis Assess Risk Analyze Shape Risk Monitor Risk Options Goals, Objectives & Perpetual Stresses Market Structural Constraints Health & Medicine

3 Goals and Objectives Cost Equitable - Fair financing of healthcare Affordable Cost no barrier to access Sufficient Adequate funding for healthcare resources Quality Effective Achieve attainable population health outcomes Efficient Maximize use of scarce resources Uniform No relatively disadvantaged groups Access Socially Acceptable Responsive to citizens wants and/or needs Universal - Healthcare for all citizens

4 Fulfilling Goals & Objective Cost Quality Access Social Solidarity (Public System) Risk and Income Solidarity: Progressive (tax or income) financing, not related to risk Cost Constraints: Available financial and healthcare resources (supply side) Scope: Essential care (needs) as defined by government Membership: Universal access regardless of age, income, or health (right of citizenship) Entitlement: All available essential healthcare services Individual Equity (Private Systems) Actuarial Fairness: Risk-based financing, with necessary regulatory constraints Cost Constraints: Managed care (supply side) and cost sharing (demand side) Scope: Timely, highly responsive access to effective care as determined by patient and physician (needs & wants) Membership: Private decision to buy insurance or to pay out-of-pocket Entitlement: None- healthcare agreed to by private contract

5 Goals and Objectives Inherent Conflict Among Goals 1.Universal Access 2.High Quality 3.Cost Effectiveness Choose any two out of three

6 Perpetual Stresses Stewardship Create and manage a balanced healthcare system that addresses different needs, wants, interests, and perceptions of various stakeholders Feasibility: Achieve simultaneous balance among Cost- Quality-Access goals and objectives Sustainability: Provide financial and healthcare resources needed to maintain balance among Cost- Quality-Access goals and objectives over time Satisfaction: Fulfill stakeholders expectations as healthcare and healthcare system evolves

7 Structural Constraints Insurance Market Failure Problem Economists generally prescribe competition as a solution for markets that do not work well. Insurance markets differ from most other markets because in insurance markets competition can destroy the market rather than make it work better. Michael Rothschild and Joseph Stiglitz: The Geneva Papers on Risk and Insurance Theory, Vol. 22 (1997) Feasibility Problems Inadequate Information Social (Systematic) Risks Risk Classification Risk Rating Capital Adequacy Behavioral Problems Moral Hazard Adverse Selection

8 Market Dynamics Private Health Insurance Systems Insurance Market Dynamics Behavioral Problems Adverse selection and moral hazard both exist Feasibility Problems Competition among insurers and individuals pursuit of their own individual equity (preferences) create feasibility problems Insurers must develop adequate Risk Management Tools to compensate for behavioral and feasibility problems Implications for Perpetual Stresses Cost control relatively difficult in private contracts Risk Management Tools create access and affordability problems Universal access is impossible Insurers compete to satisfy buyers needs and wants, provide product variety and rapid access to new technology No unpopular constraints, mandates, or cross-subsidies

9 Market Dynamics Public Healthcare Financing Systems Insurance Market Dynamics Behavioral Problems No adverse selection Moral hazard not solved Feasibility Problems Eliminated through public guarantee of adequate funding Public funding redistributes costs across generations, income levels and health status Implications for Perpetual Stresses Relative advantage to control costs Benefits are needs oriented, not wants oriented Individuals pursuit of their own preferences largely eliminated Unpopular constraints on patient access, provider fees, technology Transparency in stewardship of healthcare system Protective of needs of disadvantaged citizens

10 Health & Medicine Behavioral Causes of Disease Behavioral Choices Strongly Affect Incidence of Most Costly Chronic Diseases World Health Report 2002

11 Treatment Variations Variation in Medical Discharges from Hospitals Health & Medicine Evidence Based Medicine Variation in Surgical Discharges from Hospitals The Dartmouth Atlas of Health Care

12 Health & Medicine Integrated Health Systems Degree of Effective Medical Care Management Current Environment Managed Care Vision Indemnity PPO POS Un-integrated HMO Integrated HMO Managed Care System Integration

13 Healthcare Cost Increases: Can They Be Managed Effectively? Generalized Risk Management Analysis Assess Risk Analyze Shape Risk Monitor Risk Options Economic Analysis Analysis of Healthcare Cost Drivers Future Healthcare Cost Increases

14 Quality Health Outcomes Are Costly Population health (HALE) improves significantly with spending until reaching about $US 1,500 (PPP) Population health does not appear to improve with greater spending. Additional spending satisfies healthcare wants. All medical care for everyone Widespread access to newest technology No waiting lists Strong physician patient relationship Comfort care Additional provider income HALE (years) Health (HALE) vs. Spending, 2001 Highly Developed Nations $0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 $4,000 $4,500 $5,000 Healthcare Spending ($US PPP) World Health Reports (WHO) 2002 and 2003

15 Spending Outstrips Economic Growth Growth in healthcare costs exceed growth in GDP due to excess cost drivers: Demographic Changes Aging populations (7.2%)* Demand for Healthcare Growing Wealth (17.6%) Expanding Insurance (5.3%) Supply of Healthcare New Technologies and Greater Resources (69.6%) Annual & of Excess Real Healthcare Spending Growth -1.0% OECD Countries Management of Healthcare Cost Increases, % 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% R 2 = % % Public Spending as % of Total * % of U.S. medical care growth in real spending attributable to each factor: OECD Health Data, and, Peden and Freeland, Health Affairs, Summer 1995

16 Healthcare Cost Drivers - Demographics There Is No Significant Historical Aging Cost Relationship 4.5% Relative Growth of Healthcare Costs and Elderly Population, % Annual Growth of Healthcare Costs 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% r 2 = % 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% Annual Real Growth of 65+ Population OECD Health Data

17 Healthcare Cost Drivers - Demand at the heart of the crisis is a basic problem of values. We have a system that has believed it could pursue unlimited medical progress to meet all individual needs at an affordable price. Daniel Callahan, Ph.d., The Hastings Center As long as we pursue all the care we want (not need) when we want it costs will not be contained Conquering Death Individual Rights

18 Healthcare Cost Drivers - Demand Personal and Family Ethic Social Ethic Political Process Medical Ethic Health Decisions Healthy Lifestyle End of Life Care Urgency Aggressiveness Timeliness Preventive Care Heroic Medicine Lifestyle Medicine Non-Traditional Medicine Institutional and Frailty Care Access Cost Quality

19 Healthcare Cost Drivers - Demand Implications of Uncertainty I will hold that virtually all the special features of this industry (medical care), in fact stem from the prevalence of uncertainty. Uncertainty about the incidence of disease Uncertainty about the efficacy of treatment Solution: physician patient relationship Kenneth Arrow: Uncertainty and the Welfare Economics of Medical Care

20 Healthcare Cost Drivers - Demand Health Insurance and Healthcare Demand Cost sharing reduces spending Cost sharing cut dollars spent and quantity of use equally People with cost sharing don t just cut out nonessentials Rich and poor people had similar reductions from cost sharing Findings from the RAND Health Insurance Experiment (HEI)

21 Healthcare Cost Drivers - Technology Healthcare Quadrillema New Health Care Technology Broader Medical Care and Higher Prices Increased Scope and Demand for Health Insurance Financial Incentive for New Technology Weisbrod, Journal of Economic Literature, June 1991

22 Future Healthcare Cost Increases The Future of Health, Healthcare and Healthcare Costs are driven by: Life Expectancy Population Size, Age Distribution Biological Morbidity Burden of Disease Economic Morbidity Scope, Intensity, and Cost of Services

23 Life Expectancy Alternative Futures Natural Aging Longer life expectancy with rectangularization of survival curves Fixed maximum life span at 115 Life expectancy increasing to 85 95% of deaths between 77 and 93 Delayed Death Life expectancy without limits No limits on life span and life expectancy J. Fries, Milbank Quarterly, 1983

24 Biological Morbidity Alternative Futures Compression of morbidity 1 Elderly live longer and healthier lives Healthy Lifestyle (including preventive medical interventions) postpone onset of clinical morbidity Onset of chronic conditions of aging are delayed more rapidly than life expectancy increases Expansion of morbidity 2 Elderly live longer, but sicker lives Unchanged Lifestyle does not postpone onset of chronic conditions 1 Fries, James F., Aging, Natural Death, and the Compression of Morbidity, NEJM, July 17, Brody, Jacob A., Prospects for an Aging Population, Nature, June 6, 1985

25 Economic Morbidity Alternative Futures Compression of Care Less and/or lower cost medical care and frailty care Medical technology and de-institutionalized frailty care become Cost-Reducing Ethics of Social Solidarity and Death with Dignity allow healthcare systems to become Increasingly Constrained Expansion of Care More and/or higher cost medical care and frailty care Medical technology and institutionalized frailty care remains Cost- Increasing Ethics of Individual Rights and Conquering Death force healthcare systems to become Increasingly Unconstrained

26 Future Healthcare Cost Scenarios Developed Countries Future Healthcare Scenarios Range of Spending Relative Cost in 2001 $PPP THE Good Bad Ugly

27 Future Healthcare Cost Scenarios Developing Countries Healthcare Spending $4,500 $US - PPP per capita, 2002 price level $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 $952 Public, Out-of-Pocket, and Insured Spending in 2002 OUT-OF-POCKET PUBLIC Argentina INSURED $550 Mexico $982 Rep. of Korea $261 China $ Attainable HALE UGLY BAD GOOD $4050 $3225 $2550 $ Plausible Range Cost Drivers: Technology, Lifestyle, Ethics, Increasing Wealth

28 Healthcare Systems Dilemmas Feasibility An attainable level of health is quite costly Possible to satisfy only two of three goals (cost, quality, access) Public and private systems satisfy different goals Driven by social ethic (social solidarity vs. individual equity) Sustainability Very difficult to sustain balanced system given long term supply (technology-driven) and demand (lifestyle and ethics-driven) pressures healthcare cost increases will continue to outstrip economic growth for foreseeable future Strong personal healthcare ethic makes it virtually impossible to deny new medical care technology despite its high cost Even government stewardship is constrained Satisfaction No solution - healthcare always a political issue

29 Healthcare Cost Increases: Can They Be Managed Effectively? Generalized Risk Management Analysis Assess Risk Analyze Shape Risk Monitor Risk Options Cost Management Tools

30 Cost Management Tools: Long Term Effectiveness Manage Level or Slope of Future Cost Increases Project Healthcare Cost Increases More Effective Long Term Cost Control Tools Lower Slope Less Effective Long Term Cost Control Tools Lower Level Only Costs may be decrease either by: Lessening the burden of disease; and/or Reducing economic morbidity

31 Cost Management Tools Long Term Effectiveness More Effective Tools Feasibility: Move closer to cost, quality, and access goals Sustainability: Reduce slope of cost increases Satisfaction: Increase most stakeholders satisfaction Less Effective Tools Feasibility: Improve cost at expense of quality and/or access Sustainability: Reduce level of cost increases Satisfaction: Small to moderate decrease in stakeholders satisfaction Ineffective Tools Feasibility: No real cost savings or small savings with serious consequences to quality and/or access Sustainability: Increase costs Satisfaction: Major decrease in some stakeholders satisfaction

32 Cost Management System Level Tools Tool Effects on Goals Effects on Stresses Long Term Effectiveness Evidence Based Medicine Cost: favorable Quality: favorable Access: may be favorable Feasibility: positive Sustainability: minimal Satisfaction: positive May effectively low slope Difficult to implement Few serious problems Improve system efficiency and effectiveness Cost: favorable Quality: favorable Access: may be favorable Feasibility: positive Sustainability: minimal Satisfaction: positive More effective lowering level than slope Few serious problems Limited potential savings Controllable global budget Limit available resources Control technology Cost: favorable Quality: unfavorable Access: unfavorable Feasibility: positive Sustainability: negative Satisfaction: negative More effective lowering level than slope Create serious long term problems

33 Cost Management Institutional Level Tools Tool Effects on Goals Effects on Stresses Disease management Health promotion More effective medical care management Integrated healthcare Managed Care Negotiate unit prices Manage access Cost: positive Quality: positive Access: positive Cost: positive Quality: positive Access: positive Cost: positive Quality: neutral to negative Access: neutral to negative Feasibility: favorable Sustainability: favorable Satisfaction: favorable Feasibility: favorable Sustainability: favorable Satisfaction: favorable Feasibility: favorable Sustainability: long term limits Satisfaction: neutral Long Term Effectiveness Possible to lower both level and slope Difficult and costly to effectively implement Uncertain outcomes Lower level Relative ease of implementation Modest savings Possible to lower both level and slope May create unintended negative consequences

34 Cost Management Individual Level Tools Tool Effects on Goals Effects on Stresses Long Term Effectiveness Health education Cost: potentially positive Quality: positive Access: neutral Feasibility: favorable Sustainability: favorable Satisfaction: favorable Possible to lower both level and slope Few consequences, but difficult to make effective Change attitudes towards aggressive medical care Cost: positive Quality: neutral Access: neutral Feasibility: favorable Sustainability: favorable Satisfaction: neutral to favorable Possible to lower both level and slope Difficult to implement Cost sharing Cost: positive Quality: negative Access: negative Feasibility: favorable Sustainability: favorable Satisfaction: unfavorable Possible to lower both level and slope Unintended negative consequences

35 Cost Management Tools Potentially Effective Tools Increase government cost controls Improve system effectiveness and efficiency Institutional health promotion Proven managed care Disease management Evidence based medicine Integrated healthcare systems Individual health education BUT POTENTIAL FOR EFFECTIVE COST CONTROL IS RELATIVELY MODEST

36 Cost Management Tools Potentially Very Effective - Difficult to Implement Change social and personal ethic towards End of life care Nonessential care Aggressive medical care Cost Saving Technology

37 Cost Saving Medical Technology? Today s technological advances generally increase costs Medical research holds out long term (30 50 years) hope for inexpensive curative medical interventions Health care in 2050 might be significantly different and less costly as a % of GDP than today Per Capita Healthcare Costs Past Diagnosis Polio Paradigm Present Palliative Care Future Prevention and Curative Interventions P

38 Healthcare Cost Increases: Can They Be Managed Effectively? Summary Healthcare cost increases are driven mainly by difficult to control factors: Personal demand for healthcare New technology These cost pressures are likely to continue for the foreseeable future Most available tools lower cost level and not slope Many tools have unintended negative consequence on healthcare system goals and perpetual stresses Managing future cost increases is, at best, quite difficult, particularly in developing nations Is there a long-term solution? Advances in medical science and resultant low cost, effective technologies