Generalizing reasons for the health spending slowdown across all countries risks missing important phenomena occurring in each country
In the July 16 New York Times article "The Global Slowdown in Medical Costs," Margot Sanger-Katz suggests that a "synchronized slowdown" in healthcare spending across developed countries "offers reasons to be skeptical about neat explanations for the trends in any one country." The author cites a number of possible causes for the global slowdown that cross geographic boundaries: the economic crisis, cuts in government payment for healthcare, slowed development of new technologies and rapid global dissemination of new research findings and practice patterns.
However, painting with a global brush risks missing important phenomena occurring in each country. In the case of U.S. healthcare, this broad global explanation gives short shrift to the following fundamental, complex and unique structural changes that are underway — changes that transcend cyclical global economic factors and that are beginning to affect the long-term trajectory of U.S. healthcare spending.
The shift to value-based payment. Unsustainable spending has been largely due to a payment model that aligns high levels of payment with high levels of volume and that insulates patients and providers alike from the true costs of care. Recognizing this fundamental disconnect, government and commercial payers are introducing various models of payment that reward value — better health at lower cost — rather than volume. According to a 2013 survey, 35 percent of hospitals have risk-based contracts, up from 14 percent in 2011. The implications of this change reach far beyond payment. Being responsible for the health of a defined population requires fundamentally different infrastructure, skills, processes and resources — all designed to track the health of a population and intervene at the earliest stage and in the least expensive and intensive setting.
Changes in employer-sponsored insurance. Between 2006 and 2013, the percentage of employees in high-deductible health plans increased from just 4 percent to 20 percent, and that percentage is expected to rise, creating strong incentives for consumers to control their healthcare expenditures. Employers also are moving to defined contribution healthcare plans — giving employees a specific amount that they can then spend as they choose within a private health insurance exchange, which usually includes a low-price option with a narrow network of providers. These changes are altering the business fundamentals of healthcare, motivating providers to lower their costs and prices, and transforming healthcare from a wholesale to a retail transaction.
The shift to an outpatient-focused system. Inpatient utilization is declining throughout the country. Recent research suggests that the decrease has been caused not by economic conditions, but by a shift in the way care is being provided for conditions that are suited to management in an outpatient setting. This research also suggests that hospitals could see an additional decline of as much as 24 percent in inpatient volumes as patients are managed more aggressively in outpatient settings, thus avoiding hospitalization.
The emergence of low-cost competitors. Another sign of structural change is the emergence of well-funded competitors that are capturing market share for low-intensity conditions previously treated in higher cost settings such as hospital emergency rooms and outpatient centers. Urgent care chains are using a fast-food model of replicability for rapid growth, and offer care at much lower prices. The average price of an urgent care visit for an upper respiratory infection, for example, is $110 compared with $665 for a hospital emergency department. Convenience clinics housed in retail outlets with pharmacies are projected to double in the next two years. The average price for a visit in that setting is $60, compared with $127 in a physician's office.
The rise of retail healthcare. Increasingly, consumers are choosing healthcare providers as they would other retail products and services: based on price and convenience. With the encouragement of employers and the aid of web-based price-comparison tools, patients are being drawn away from hospitals, with their low level of convenience and high prices, in favor of organizations with lower prices and greater convenience — broad geographic dispersion, longer hours and shorter waiting times.
The explosion of digital healthcare. Digital healthcare is another way that healthcare is shifting toward the least intensive and expensive setting. Forty-two percent of U.S. hospitals have telehealth capabilities. There are more than 20,000 health-related smartphone apps. And insurers are dramatically expanding access to online consultations with physicians. This level of activity is significant, but represents only a part of the potential for digital connectivity to reshape healthcare, as it has reshaped activities in virtually every other walk of life.
These structural changes are affecting U.S. healthcare spending projections. One key indicator of the sustainability of U.S. healthcare is the date at which the Medicare Trust Fund is projected to be exhausted. Over the past three years, the Congressional Budget Office has significantly extended its forecast for that date — from 2020 to 2030. In explaining this change to its healthcare spending outlook, the CBO "found no direct link between the recession and slower growth in spending for Medicare."
According to economist Peter Orszag, former Director of the White House Office of Management and Budget, the U.S. healthcare spending slowdown is not "entirely cyclical," but arises in part from "changes in the practice of medicine that go deeper than economic and technological trends." Orszag explains that providers are "trying to get ahead" of changes to the payment system. “The worst place to be is one foot on the boat and one foot on the dock when the boat's moving away from the dock."
The number, nature, and momentum of these changes show that a transformation is underway in the U.S. healthcare system, one poised to fundamentally and permanently change the way healthcare is financed and delivered. An understanding of this transformation is key to ensuring that these changes transpire in a way that best serves our population.
Kenneth Kaufman is Chair, Kaufman Hall, and can be reached at kkaufman@kaufmanhall.com.