1. Is It Possible for The U.S. toIs It Possible for The U.S. to
Control Health Care Costs?Control Health Care Costs?
Stuart H. Altman, Ph.D.Stuart H. Altman, Ph.D.
Sol C. Chaikin Professor of National Health PolicySol C. Chaikin Professor of National Health Policy
The Heller School for Social Policy and ManagementThe Heller School for Social Policy and Management
Brandeis UniversityBrandeis University

2. y = 64.645x + 504.38
0
500
1000
1500
2000
2500
3000
3500
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
PerCapitaNHEin$Per Capita Growth In Health ExpendituresPer Capita Growth In Health Expenditures
Has Been Growing at 2% Above InflationHas Been Growing at 2% Above Inflation
For 40 Years---For 40 Years---Will We Change It?Will We Change It?(adjusted for inflation)(adjusted for inflation)

3. The U.S. Has In The Past Tried ToThe U.S. Has In The Past Tried To
Control Health Spending---Control Health Spending---
BUT----With Limited Success andBUT----With Limited Success and
For a Limited Time PeriodFor a Limited Time Period

4. 0
500
1000
1500
2000
2500
3000
3500
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
PerCapitaNHEin$
Gov’t Reg.
M&M Begins
Managed Care
?
Little Reg./Little Mkt.
Y = 52.703x – 102898Y = 52.703x – 102898
Y = 40.31x – 78465Y = 40.31x – 78465
Y = 88.486x – 173967Y = 88.486x – 173967
Y = 37.925x –Y = 37.925x –
7319573195
Y = 107.95x – 1025.3Y = 107.95x – 1025.3
The Changing Growth Pattern of Per CapitaThe Changing Growth Pattern of Per Capita
National Health ExpenditureNational Health Expenditure
1966-20051966-2005
(adjusted for inflation)(adjusted for inflation)

5. Why Reform Legislation InWhy Reform Legislation In
Massachusetts and ProposedMassachusetts and Proposed
National Reform Have LimitedNational Reform Have Limited
Cost ReductionsCost Reductions

6. If Legislation Included SeriousIf Legislation Included Serious
Control of Costs---Control of Costs---
I fear We Could Not RepealI fear We Could Not Repeal
Altman’s LawAltman’s Law

7. Altman’s LawAltman’s Law
Most Every PowerfulMost Every Powerful
Constituent Group FavorsConstituent Group Favors
Health Reform BUT If It is NotHealth Reform BUT If It is Not
Their Plan They Prefer TheTheir Plan They Prefer The
“Status Quo”“Status Quo”

8. But--- Current Rebellion AgainstBut--- Current Rebellion Against
National Health Reform CentersNational Health Reform Centers
On Anger of Citizens That WantOn Anger of Citizens That Want
Lower CostsLower Costs
However They Do Not Want AnyHowever They Do Not Want Any
Restrictions on Where They Get CareRestrictions on Where They Get Care
and How Much Care They Receive!and How Much Care They Receive!

9. Where Do We Go FromWhere Do We Go From
Here?Here?

10. Without Health ReformWithout Health Reform
Medicare Trust Fund Could GoMedicare Trust Fund Could Go
Broke By 2017Broke By 2017

11. The Problem Is Not Medicare’sThe Problem Is Not Medicare’s
Alone It Is Our Entire Health CareAlone It Is Our Entire Health Care
SystemSystem

12. Even With No Change In CoverageEven With No Change In Coverage
Government Will DominateGovernment Will Dominate
Institutional PaymentsInstitutional Payments
54.4%
66.3%
37.5%
24.8%
5.5% 7.3%
2.6% 1.7%
0%
10%
20%
30%
40%
50%
60%
70%
Gov. Pvt. Uncomp. Care Other
Proportion Of Hospital Expenses Attributed To
Patients By Payer Source
2000
2025

13. If Payment Reductions FocusIf Payment Reductions Focus
Only on Government SpendingOnly on Government Spending
Amounts ---Amounts ---
What About Private PaymentWhat About Private Payment
Rates?Rates?
Does Cost Shifting Exist?Does Cost Shifting Exist?

14. Can Private Insurance Payments Continue ToCan Private Insurance Payments Continue To
Pay For The Shortfall In Government PaymentsPay For The Shortfall In Government Payments
Source: Avalere Health analysis of American Hospital Association Annual Survey data, 2005, for community hospitals.
(1) Includes Medicaid Disproportionate Share payments.
92.0%
85.0%
138.0%
130.0%
157.4%
60%
80%
100%
120%
140%
160%
180%
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Medicare Medicaid(1) Private Payer
Hospital Payment-to-Cost RatiosHospital Payment-to-Cost Ratios
(Government Ratios Maintained at Current Levels)(Government Ratios Maintained at Current Levels)

15. What is Driving Increases InWhat is Driving Increases In
Health Costs?Health Costs?
Price Increases Versus Growth InPrice Increases Versus Growth In
Use of Services!Use of Services!

16. Factors Affecting Per-Capita SpendingFactors Affecting Per-Capita Spending
Trend for Hospital Services 1994-2004Trend for Hospital Services 1994-2004
-1.0%
1.0%
3.0%
5.0%
7.0%
9.0%
11.0%
13.0%
94 95 96 97 98 99 00 01 02 03 04
Quantity Price Spending
Source: Strunk et al. “Health Care Costs: Declining Growth Rate Pauses in 2004,” Health Affairs, June

17. What Is Driving Health InsuranceWhat Is Driving Health Insurance
PremiumsPremiums
Price vs. UtilizationPrice vs. Utilization
25%
75%
43%
54%
57%
46%
0%
10%
20%
30%
40%
50%
60%
70%
80%
2002 2005 2007
Percentage of Growth
Related to Utilization
Percentage of Growth
Related to Price Increases
Mckinsey Global Institute: “Accounting for the Cost of Health Care in the United States

18. Even If Price Increases NowEven If Price Increases Now
Dominate The Growth inDominate The Growth in
SpendingSpending
The Focus Must Be On Changing theThe Focus Must Be On Changing the
Delivery System To Improve ProductivityDelivery System To Improve Productivity
and Eliminate Unnecessary Servicesand Eliminate Unnecessary Services

19. Any Significant Restructuring ofAny Significant Restructuring of
Healthcare Delivery System WillHealthcare Delivery System Will
Require Reimbursement Systems ThatRequire Reimbursement Systems That
Supports Such Behavior ---Supports Such Behavior ---
Fee-for-Service System Needs to beFee-for-Service System Needs to be
Modified or Abandoned!Modified or Abandoned!

20. Options For ChangingOptions For Changing
Payment SystemPayment System
• Bundled or Case PaymentsBundled or Case Payments
• Significant Pay-for-Performance Add-OnSignificant Pay-for-Performance Add-On
or Penaltiesor Penalties
• Value-Based PaymentsValue-Based Payments
• Permit Wider Use of “Gain-sharing”Permit Wider Use of “Gain-sharing”
Between Hospitals and DoctorsBetween Hospitals and Doctors

21. Aligning Incentives BetweenAligning Incentives Between
Hospitals And DoctorsHospitals And Doctors
• The Importance of a Value-Based Payment
System ---
– Allows Hospitals to Be Rewarded for More
Appropriate and Cost Effective Care
– Permits Hospitals to Share With Physicians The
Benefits of Higher Valued Care
• Need Transparency and Elimination of
Conflicts of Interest

22. Massachusetts Actively WorkingMassachusetts Actively Working
To Develop A Cost ContainmentTo Develop A Cost Containment
StrategyStrategy
• Two State Level Commissions Have RecommendedTwo State Level Commissions Have Recommended
Restructuring State Health Payment SystemRestructuring State Health Payment System
– Bundle or Global PaymentsBundle or Global Payments
– Focus on Integrated Care With Incentives for Value AddedFocus on Integrated Care With Incentives for Value Added
ServicesServices
– Limits on Growth in SpendingLimits on Growth in Spending
• Governor and Legislature Reviewing OptionsGovernor and Legislature Reviewing Options
• Largest Private Insurer—BCBS Developed VoluntaryLargest Private Insurer—BCBS Developed Voluntary
Global Payment SystemGlobal Payment System

23. What Payment/Delivery SystemWhat Payment/Delivery System
Changes Was To Be In ReformChanges Was To Be In Reform
LegislationLegislation

24. Components of Reform ThatComponents of Reform That
Could Lower SpendingCould Lower Spending
• Simplify Administration FunctionsSimplify Administration Functions
– Financial and Eligibility RequirementsFinancial and Eligibility Requirements
– Enrollment and DisenrollmentEnrollment and Disenrollment
– Electronic Payment TransactionsElectronic Payment Transactions
• Reduce Medicare SpendingReduce Medicare Spending
– Medicare Advantage PlansMedicare Advantage Plans
– Disproportionate Share PaymentsDisproportionate Share Payments
– Update PaymentsUpdate Payments
– Reduce Payments for Hospital-Acquired ConditionsReduce Payments for Hospital-Acquired Conditions
and Preventable Readmissionsand Preventable Readmissions
– More Powerful Medicare Advisory CommiMore Powerful Medicare Advisory Commission
• Implementation of Cost Reducing PilotImplementation of Cost Reducing Pilot
ProgramsPrograms
• Medicare Innovation CenterMedicare Innovation Center

25. Components of Reform ThatComponents of Reform That
Could Lower SpendingCould Lower Spending
• Drug PricingDrug Pricing
– House Would –House Would –
• Require Secretary to Negotiate prices WithRequire Secretary to Negotiate prices With
Pharmaceutical ManufacturersPharmaceutical Manufacturers
• Increase Medicaid Drug RebatesIncrease Medicaid Drug Rebates
• Require Institute of Medicine to study geographicRequire Institute of Medicine to study geographic
variation in Medicare spending and recommendvariation in Medicare spending and recommend
revising geographic adjustment factorsrevising geographic adjustment factors
• Increase funding for comparative effectivenessIncrease funding for comparative effectiveness
researchresearch
• House --- Incentive payments to States that enactHouse --- Incentive payments to States that enact
medical liability laws that simplify the systemmedical liability laws that simplify the system

26. Components of Reform That Could ImproveComponents of Reform That Could Improve
Quality And Health System PerformanceQuality And Health System Performance
• Establish Medicare and Medicaid pilot programs thatEstablish Medicare and Medicaid pilot programs that
bundle payments for most healthcare servicesbundle payments for most healthcare services
• Create Medicare independence at homeCreate Medicare independence at home
demonstrationsdemonstrations
• Establish Center for Quality ImprovementEstablish Center for Quality Improvement
• Establish Community-based collaborative careEstablish Community-based collaborative care
network program for chronic care and emergencynetwork program for chronic care and emergency
department caredepartment care
• Establish national prevention, health promotion andEstablish national prevention, health promotion and
public health councilpublic health council
– Remove Medicare cost sharing for proven preventative servicesRemove Medicare cost sharing for proven preventative services

27. Components Of Reform That CouldComponents Of Reform That Could
Improve Quality And Health SystemImprove Quality And Health System
PerformancePerformance
• Long-Term CareLong-Term Care
– Establish a National Voluntary Payroll Deduction InsuranceEstablish a National Voluntary Payroll Deduction Insurance
Program for Community Living AssistantsProgram for Community Living Assistants
– New Medicaid Options for Home and Community-based servicesNew Medicaid Options for Home and Community-based services
• Workforce TrainingWorkforce Training
– Increase Unused GME Positions for Primary Care andIncrease Unused GME Positions for Primary Care and
General SurgeryGeneral Surgery
– Increase Scholarship Funding for Primary Care and otherIncrease Scholarship Funding for Primary Care and other
shortage occupationsshortage occupations
• Expand Requirements for Non-profit Hospitals toExpand Requirements for Non-profit Hospitals to
Conduct Community Needs Assessment and helpConduct Community Needs Assessment and help
support programs to meet critical community needssupport programs to meet critical community needs

28. Will End of Health Reform andWill End of Health Reform and
Recent Slowdown In Growth OfRecent Slowdown In Growth Of
Healthcare Spending Blunt HealthHealthcare Spending Blunt Health
Cost Containment Efforts?Cost Containment Efforts?
What About The PotentialWhat About The Potential
Bankruptcy of The Medicare TrustBankruptcy of The Medicare Trust
Fund?Fund?

29. National Health ExpenditureNational Health Expenditure
Growth Slows In 2008Growth Slows In 2008
4.4%
6.0%
6.6%
7.9%
6.6%
0%
2%
4%
6%
8%
10%
2000 2005 2006 2007 2008

30. Growth In Spending By Type ofGrowth In Spending By Type of
ServiceService
20082008
0.7%
3.2%
4.4%
5.0%
4.5%
Administration & Private Health
Insurance
Prescription Drugs
Physician & Cinical Care
Hospital Care
Over all

31. But Percent Of GDP Spent onBut Percent Of GDP Spent on
Healthcare Keeps GrowingHealthcare Keeps Growing
Percentage of GDP Spent on Health care
13.6%
15.7% 15.8% 15.9% 16.2%
0%
5%
10%
15%
20%
2000 2005 2006 2007 2008