Bending the Cost Curve: Regulatory Solutions

Posted by & filed under CGR Staff, Rochester Business Journal.

Jim FatulaKent Gardner
There is a speechwriter in Washington who smiles each time someone says “bending the cost curve.” “Cutting health care costs” may be unattainable but “bending the curve” is essential.

To summarize our first two columns: Cost lies at the heart of the health care problem. Health care insurance masks the price signals that guide buyers and sellers. Providers are paid to do more and consumers have little incentive to refuse (go to and click on the Policy Wonk link to read the first two).

In this column and the next, we look at ways to tame cost growth.

COST=QUANTITY x PRICE. We will only spend less if we do less, pay less, or both. To control health care costs, we must either

  • Cut provider reimbursement by reducing fees and/or shifting lower-cost providers (e.g. from hospital ERs to “urgent care” centers or from physicians to nurse practitioners), or
  • Cut the volume of services by reducing consumer demand (e.g. increasing co-pays or managing care more aggressively) and/or limiting provider supply (e.g. limiting the number of MRI machines in a market or cutting inpatient beds in hospitals).

The arithmetic is simple. The politics is not. Cutting prices of health care services means cutting the incomes of health care providers. Cutting services means saying “no” to consumers. Shifting care to low cost providers—e.g. from hospitals to urgent care centers—shifts income from one group of providers to another. Nearly every choice we confront is some form of “win-lose,” guaranteed to stir up opposition.

We control cost either through regulation and oversight or by changing the incentives confronting providers and consumers. This week, we discuss regulatory solutions.

Take control. The United Kingdom’s National Health Service (NHS) is the ultimate regulatory approach. Health care professionals are NHS employees. Policies over coverage and utilization are determined centrally. A “single payor” system, nearly all health care spending flows through the NHS. Employing 1.4 million in 2008, the NHS is one of the world’s five largest employers. Parliament imposes a global budget on the NHS, which sets physician salaries, access to care and other cost drivers. Despite well-publicized problems, it remains popular with voters. The federal government in the U.S. provides very little direct care (outside the Veterans Administration). 47% of health care spending is from public sources; 34% is federal.

Cut provider fees. With Medicare responsible for about 20% of total health care spending, provider fees set by the federal Centers for Medicare and Medicaid, typically below the prices paid by private insurance, serve as an industry benchmark. This approach can backfire: Physicians may stop accepting Medicare. Mistakes in pricing distort labor supply—too many medical students may choose to pursue a specialty that gets better fees. Providers may react by billing more procedures or raising prices for other payors. Many feel entitled to “game” the system to offset the cost of complying with an inefficient and unfair payment mechanism.

Politics may intervene. Fee reductions imposed by one Congress can be reversed by the next. The Senate Finance Committee has proposed a Medicare Commission—modeled after the military base closings commission—to control the growth in payments for Medicare providers, although it is meeting stiff resistance.

Manage care. Some health care is unnecessary, counterproductive or simply not cost effective—about 30% of the total, according to Elliott Fisher at Dartmouth. As an example, the effectiveness of spinal fusion is unproven. “The indications for this invasive and expensive procedure remain unclear despite its rapidly expanding use” (New England Journal of Medicine, 2004). Surgeons may not be objective when judging the value of spinal fusion over less costly procedures. And drug companies are often accused of pushing a new drug that is no more effective than an older drug available in a generic—less profitable—form.

Expert panels can be convened to approve or disapprove specific procedures, therapies and drugs. As an example, New York’s Medicaid program adopted a drug “formulary,” a list of approved drugs deemed both cost and medically effective. At the federal level, an expansion of “comparative effectiveness” research is included in several proposals pending in Congress. The House version prohibits the use of findings to make coverage decisions in Medicare, however.

Oversight is itself costly and the decisions of panels can be arbitrary. Experts can disagree on what constitutes evidence of effectiveness. In our last column, we mentioned a patient with glioblastoma (a type of brain tumor) who was treated with Avastin before it was approved for this use by the Food and Drug Administration. An oversight panel might reasonably have prevented its use.

Better management of chronic disease, responsible for up to 75% of health care costs, can both cut the cost of care and improve outcomes. In a fragmented fee-for-service system, coordination of care among health care professionals and patients is a challenge. This is part of what President Obama found appealing at Mayo and Cleveland clinics.

Manage supply. The Dartmouth Atlas of Health Care reports that regional variation in health care is affected by the relative abundance of facilities and medical professionals. Approval processes for new equipment, programs and facilities are common. As of 2008, 36 states required providers to obtain permission for new construction, programs or major equipment. New York’s “certificate of need” (CON) program was the first, established in 1964. Enforcement varies. NY’s program did not prevent the excess capacity that forced creation of a commission to cull surplus facilities. Regional planning entities like the Finger Lakes Health Systems Agency can also contribute, although their role is only advisory under current law.

No panacea. A solution to health cost growth will almost certainly include some regulation, although regulatory solutions add to administrative cost and expose health policy to political influence. Insurance coverage mandates in NYS, for example, are influenced by provider group lobbying, thus increasing total cost. Limitations emerging from oversight panels can be overturned in the political arena.

Next week we explore “market oriented” tools to “bend the cost curve.”

Kent Gardner, Ph.D., President & Chief Economist with Guest Columnist James Fatula, Ph.D., Chair & Assoc. Prof., Dept. of Public Administration, SUNY Brockport

Published in the Rochester (NY) Business Journal October 16, 2009